nioeratt)  of  * 
4  ^(California 


33fTund 


HOW  TO  FIND 


Manufacturing  Costs 


AND 


Selling  Costs 


BY 


LESLIE   UNCKLESS 

»t 

COST   ACCOUNTANT   AND   DEVISER 
OF   OFFICE   SYSTEMS 


FIRST   EDITION 


PUBLISHED  BY  MODERN  METHODS  PUBLISHING  COMPANY 
DETROIT,  MICH. 


COPYRIGHT,  1909,  BY  LESLIE  UNCKLESS 
Aw,  RIGHTS  RESERVED 


CONTENTS 

PAGE; 

How  to  Get  New  Ideas 4 

Getting  All  the  Information 9 

Average  Cost 10 

Follow-up    ii 

Labor  13 

Methods  for  Payment 15 

Piece  Work 15 

Premium  Plan 16 

Contract  Work 17 

Time    17 

Classification  of  Material 18 

Estimates    22 

Time  Cards 25 

Cost  of  Material 28 

Classification  of  Office  Expense 29 

System 30 

Cost  by  Lots 31 

Some  Items  of  Indirect  Labor  Expense 33 

Experimental  Work,  Designing,  Etc 34 

Patterns    36 

Handling  Various  Accounts  Relating  to  Costs 39 

Salesmen's   Accounts . 46 

Shop  Orders 46 

Indexing  Orders 49 

Stock  Room 50 

Reports    51 

Returned   Goods 54 

Changing  of  Prices 57 

Continuous  Process  Factories 58 

Receiving   Department .  58 


239126 


iv  CONTENTS 

PAGE; 

Basis  of  Apportionment 62 

Rush  Orders 64 

Water  Power 66 

Sinking  Fund 66 

Administration   Expense 67 

Rent    67 

Depreciation    68 

Freight  and  Demurrage 69 

Discount   71 

Royalties  and  Patents 71 

Burden   73 

Heat,  Light  and  Power 75 

Cartage  Account 78 

Mechanical    Appliances 79 

Loose-Leaf  Books  and  Card  Systems 82 

Purchasing    83 

Claims  and  How  to  Handle  Them 84 

How  to  File  Claims 89 


HOW  TO  FIND 

MANUFACTURING  COSTS  AND 
SELLING  COSTS 


BY  LL5LIL  UNCKLL55 

COST- ACCOUNTANT  AND  DEVISER  OF  OFFICE 
AND  FACTORY  SYSTEMS 


INTRODUCTION 

The  question  of  cost  is  a  vital  one  to  every  manufac- 
turer, and  while  it  is  true  that  most  manufacturers  realize 
this,  there  are  many  who  have  to  learn  the  underlying 
principle,  the  basic  law  of  cost,  which  is  that  Labor  plus 
Material  plus  Expense  equals  cost. 

In  the  earlier  days  cost  accounting  was  not  given 
the  consideration  it  is  now.  It  was  not  given  the  atten- 
tion it  deserved,  but  as  competition  grew  keener  it  became 
necessary  to  know  how  much  the  manufacture  of  goods 
was  costing  and  to  know  as  soon  as  possible  after  the 
material  was  made,  and  in  many  cases  to  figure  in  advance 
the  probable  cost,  which  required  making  an  estimate. 

Now  there  are  few  manufacturers  who  do  not  figure 
out  their  costs,  and  while  the  information  contained  in 
this  work  is  not  to  be  considered  final,  it  is  the  outcome 
of  experience  gained  in  the  cost  accounting  departments 
of  many  different  concerns. 

The  subject  naturally  divides  itself  into  two  parts. 
Manufacturing  cost  and  Selling  cost,  the  first  having  to 
do  only  with  the  manufacture  of  goods,  the  second  with 
their  sale. 

Both  consist  largely  of  expense  items,  but  in   this 


2  MANUFACTURING  COSTS 

connection  it  is  well  to  consider  that  expenses  are  neces- 
sary to  the  conduct  of  any  business  and  should  not  be 
considered  as  unessential  or  as  loss.  In  truth,  all  Labor 
and  Material  may  be  considered  under  the  head  of 
expense,  yet,  from  the  fact  that  they  are  more  easily 
taken  care  of  in  other  ways,  they  are  not  usually  consid- 
ered under  the  head  of  expense.  Some  labor  and  material 
can  be  charged  direct  to  an  article,  which  simplifies  the 
work  of  the  cost  department,  while  some  items  which 
are  required  in  the  factory,  and  without  which  it  could 
not  exist,  do  not  admit  of  such  treatment.  They  must  be 
placed  in  a  general  account  and  from  that  point  be  dis- 
tributed, usually  by  percentages,  according  to  a  definite 
plan  of  apportionment  which  has  been  arranged. 

The  following  chart  shows  the  various  divisions  and 
subdivisions  which,  in  total,  form  a  manufacturing  estab- 
lishment. In  the  small  plant  the  owner  may  be  the  whole 
executive  force,  but  as  his  business  grows  he  must  dele- 
gate a  portion  of  this  work  to  others,  and  in  the  larger 
concerns  the  divisions  shown  are  recognized  and  the 
relations  they  bear  to  each  other  are  known  and  observed. 
In  this  chart  we  find  that  costs  come  under  the  head  of 
accounting,  which  is  but  natural,  and  that  it  is  connected 
to  a  certain  extent  with  various  other  parts  of  the 
concern. 

To  this  department  primarily  belongs  the  work  of 
taking  the  data  furnished  b)r  the  timekeeping,  accounting 
and  stock  departments,  arranging  and  tabulating  this 
information  to  show  the  net  results.  There  is  nothing 
creative  or  imaginative  in  the  proposition  as  it  is  generally 
considered,  yet  it  affords  an  unusual  opportunity  for  the 
cost  clerk  who  requires  reasons  for  his  acts  and  is  not 
content  to  do  a  thing  in  a  certain  way  merely  because 
somebody  "always  did  it  that  way."  The  enterprising 
man  will  weigh  the  acts  of  his  predecessor  and  his  own 


AND  SELLING  COSTS  3 

as  well,  satisfy  himself  as  to  their  soundness  or  lack  of  it, 
and  if  he  finds  that  they  are  not  based  on  correct  reason- 
ing, he  will  reject  them  and  substitute  a  system  which  is 
correct.  To  be  on  the  lookout  for  improved  methods  in 
cost  accounting-  is  to  make  of  yourself  a  more  valuable 


Stoo  K  hoi  cl 


Directors ] 


V.Presdt.  Secy,  Treas. 


Tlanuf  actunng  A|          Sales  lAcc  o^ 


Superintendent    II    Sales  Hgr.  |~6oo  K  Kee  pers 


[    Salesman j  [  Tj^e  Kgeyer.5 


WorKmery  |  |  Cost    Clerk 


(Stenographer 


CHART   OF   DIVISIONS   AND   SUB-DIVISIONS. 

employe,  or  in  the  case  of  an  employer,  to  build  for 
himself  a  bigger  business.  No  system  is  so  good  that  it 
cannot  be  improved,  and  suggestions  to  improve  the 
methods  of  an  institution  are  usually  welcomed,  even 
though  they  may  not  be  adopted  at  once. 

Perhaps  this  treatise  on  costs  will  contain  nothing 
new  to  you,  but  the  ideas  will  be  expressed  in  a  way  which 


4  .MANUFACTURING  COSTS 

should  make  them  worthy  of  the  study  of  anybody  who 
is  open  to  suggestion. 

HOW  TO  GET  NEW  IDEAS 

The  basic  law  of  costs  is — Material  plus  Labor  plus 
Expense  equals  Cost,  and  the  principles  of  cost  account- 
ing do  not  change.  They  are  absolutely  similar  in 
every  case,  no  matter  what  the  product  or  how  simple 
or  complex  its  manufacture.  The  only  difference  then 
between  the  various  cost  systems  offered  must  be  in  the 
application  of  the  underlying  principles  of  the  science,  or, 
in  some  cases,  we  might  say  the  absence  of  application, 
since  some  men  ignore  them  to  a  certain  extent  and 
always  to  the  detriment  of  their  business.  Manipulation 
of  accounts  may  stave  off  bankruptcy  for  a  time,  but 
results  eventually  in  a  pyrotechnic  finish. 

While  on  the  subject  of  Organization  it  is  well  to 
consider  not  only  the  benefit  of  new  ideas,  but  how  to  get 
them,  as  a  business  should  be  built  from  within.  Period- 
ical meetings  of  the  executive  force  seem  to  be  best  in 
this  respect,  as  thus  there  is  given  an  opportunity  for 
interchanging  of  ideas.  A  meeting  of  that  kind  should  be 
a  meeting  where  suggestion  is  the  rule.  A  "knockfest" 
defeats  the  object  for  which  the  meeting  was  called. 
There  isn't  a  man  in  an  office  who  is  so  devoid  of  origi- 
nality that  he  cannot  make  a  good  suggestion.  Possibly 
some  will  be  valueless,  but  to  secure  anything  of  value 
it  is  necessary  to  separate  the  good  from  the  bad.  As  a 
further  reason  for  the  general  meeting,  men  do  not  like 
to  give  ideas  or  suggestions  in  private  to  an  individual, 
as  the  credit  for  them  is  generally  not  given  to  the 
originator.  The  open  meeting  on  the  contrary  gives  each 


AND  SELLING  COSTS  5 

man  an  opportunity  to  get  credit  for  his  ideas,  whkh  is 
just  what  he  wants  and  just  what  he  should  have. 


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To  know  at  the  end  of  the  year  what  has  been  the 
profit  or  loss  for  the  year  is  not  enough.     Monthly  state- 


MANUFACTURING  COSTS 


ments  should  be  required  showing  net  profit  or  loss,  and 
the  manufacturer  who  has  the  matter  of  costs  down  to  a 
certainty  can  know  as  often  as  that  and  at  a  small 
expense.  If  the  article  manufactured  is,  for  instance,  an 
automobile,  it  is  not  enough  to  know  the  total  cost  per 


COST  OF 
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COMPARATIVE  REPORT  ON   COST  OF  CASTINGS. 

machine.  The  cost  of  different  groups  such  as  frame, 
engine,  body,  etc.,  must  be  known  as  well,  and  back  of 
that  must  be  available  the  cost  of  separate  parts  of  each 
group  if  the  cost  system  is  to  be  a  success.  It  is  not 
meant  by  this  that  a  cost  must  be  figured  on  each  part  in 
every  case,  although  that  may  be  done,  but  if  it  is  at  any 
time  necessarv  or  desirable  to  know  that  cost,  the  system 


AND  SELLING  COSTS  7 

should  admit  of  its  being  shown  without  the  necessity  of 
making  an  exhaustive  research. 

Cost  keeping  can  be  carried  to  extremes  as  well  as 
anything  else,  and  it  is  quite  as  important  to  steer  clear 
of  red  tape  as  it  is  to  have  a  cost  system  at  all.  The  fol- 
lowing formula  explains  how  the  cost  of  an  automobile 
might  be  shown : 

Cost  of  parts  of  a  group  =  cost  of  group. 

Cost  of  groups  +  assembling  —  cost  of  machine. 

In  other  words,  the  part  costs  something,  the  sum  of 
the  parts  equals  the  cost  of  the  group,  and  the  cost  of  the 
different  groups  plus  the  assembling  equals  the  cost  of 
the  machine. 

Suppose,  for  example,  we  are  figuring  the  cost  of 
engines  for  an  automobile  and  find  that  they  cost  $150.00 
each  while  the  estimate  is  $100.00  each,  an  increase  of 
50%  and  of  course  very  unsatisfactory.  The  question, 
"where  is  the  increase?"  naturally  arises  and  it  becomes 
necessary  to  analyze  this  particular  cost,  which  may  be 
gone  about  in  the  following  way : 

A  list  of  the  parts  constituting  the  engine  is  made 
out  and  the  estimated  cost  looked  up.  Considering  first 
the  cylinder,  we  will  suppose  that  the  cost  is  made  up  as 
follows : 

COST  ESTIMATE 

Material $4.00         $3.50 

Labor  7.00          7.00 

Expense 7.25  7.00 

Total  $18.25      $I7-5o 

Though  the  estimate  is  $17.50,  there  is  an  increase 
of  75  cents  on  each  engine  and  so  on  throughout  the 
whole  list  of  parts.  The  difference  will  be  shown  on  each, 
and  at  the  end,  if  the  calculations  have  been  correct,  we 
find  that  the  net  amount  of  increase  is  $50.00. 

Now,  having  found  where  the  increase  is,  the  next 


8  MANUFACTURING  COSTS 

question  is,  "why  the  increase?,"  which  will  have  to  be 
explained  by  the  foreman  having  the  work  in  charge,  pro- 
vided any  increase  in  cost  of  labor  is  found.  If  changes 
in  expense  or  material  are  discovered,  the  estimate  should 
be  revised  to  conform  to  the  correct  figures.  If  the  work 
is  all  done  "piece  work,"  no  increase  should  be  found 
except  as  may  occur  by  reason  of  defective  parts  on  which 
some  labor  has  been  done,  for  the  timekeeping  department 
will  pay  only  for  the  number  of  good  pieces  delivered 
and  the  inspection  department  will  keep  the  timekeeper 
posted  in  that  respect. 

Where  part  of  the  work  is  done  "day  work,"  how- 
ever, it  is  very  likely  that  increases  will  occur  and  to  the 
foreman  in  charge  belongs  to  a  great  extent  the  work  of 
keeping  up  the  production  per  employe  which  will  keep 
down  the  cost.  The  forms  and  systems  described  through- 
out this  work  will,  if  followed,  make  possible  comparisons 
of  cost  with  estimate  of  previous  costs,  and  these  are  of 
course  of  great  value. 

All  direct  labor  charges — labor  1 
which  is  for  some  particular  article    Y  Labor 
and  no  other.  J 

All    material   directly   entering  ] 
into  the  construction  of  an  article,    }•  Material 
parts  purchased  for  it  or  used  on  it.  J  j  Manufacturing 

Cost 

All  items  of  labor  and  material 
without  which  it  could  not  be  made, 
but  of  such  a  nature  that  they  do 
not  enter  into  the  article  in  a  direct  i  ^  } 

way.     In  other  words,  all  material    [  ^<xPense 
and  labor  used  in  a  factory  not  be-    I 
longing  to   either   of  the   first   two    | 
classes.  J 

CHART   SHOWING  THE  THREE  GENERAL  CLASSES  INTO 

WHICH  EVERYTHING  ENTERING  INTO 

A  COST  MAY  BE  DIVIDED. 


AND  SELLING  COSTS  9 

GETTING  ALL  THE  INFORMATION 

In  figuring  the  cost  of  castings,  for  instance,  it  is  not 
enough  to  know  that  there  were  a  certain  number  of 
pounds  produced  and  that  the  total  charges  equaled  a 
certain  amount. 

This  may  do  in  some  instances,  it  may  be  the  only 
information  required,  but  in  most  foundries  there  is  the 
inventory  to  be  considered  and  the  line  of  investigation 
in  figuring  a  cost  would  be  about  as  follows : 

Are  there  any  cores  for  this  job  in  stock  which  will 
be  used  later? 

At  the  close  of  the  month  were  there  any  molds  in 
the  foundry  not  poured,  on  which  the  labor  charges  went 
in  with  the  month's  production,  etc.? 

The  cost  clerk  in  any  establishment  should  not  only 
use  the  information  given  him,  but  should  have  the 
requisite  knowledge  of  the  business  to  enable  him  to 
know  when  he  has  received  all  the  information  necessary. 

When  all  the  data  required  has  been  furnished,  he 
will  be  able  to  figure  a  correct  cost  and  not  until  that 
time. 

It  makes  no  difference  what  the  product,  the  loose 
ends  must  be  gathered  up.  The  printed  forms  used  in 
the  cost  department  may  sometimes  be  printed  so  that  any 
omissions  will  be  noticed  and  where  possible  this  should 
be  done,  so  that  there  will  be  no  excuse  for  anything  to 
be  overlooked.  To  fix  the  importance  of  these  facts  in 
your  mind,  the  following  formula  is  given : 

Total  charges  less  value  of  inventory  =  cost. 

Less  inventory — here  is  where  the  trouble  often  is. 
The  total  charges  are  easy  to  get,  but  the  inventory  is 


10  MANUFACTURING  COSTS 

often  overlooked,  or  if  taken,  is  sometimes  not  figured 
properly. 

The  correct  amount  of  an  inventory  is  not  always 
what  the  parts  represented  have  cost,  but  rather  it  is 
what  they  should  have  cost  and  nothing  should  be  inven- 
toried at  a  higher  figure  than  a  duplicate  lot  could  be 
produced  for. 

AVERAGE  COST 

Average  cost  of  output  or  production  is  sometimes 
a  good  thing  to  know,  but  is  rarely  an  accurate  way  to 
figure  cost's. 

A  foundry  might  wish  to  know  the  average  cost  per 
pound  of  each  month's  production,  yet  to  figure  that  each 
pound  of  castings  produced  has  cost  just  this  average 
amount  would  be  to  make  a  great  mistake.  Some  cast- 
ings will  cost  three  cents  per  pound  at  the  shipping  room 
scales,  others  may  cost  fifteen  cents  per  pound,  and  the 
separate  cost  of  each  kind  is  necessary. 

As  a  rule,  the  heavier  the  casting  the  lower  the  cost 
per  pound,  but  these  matters  should  be  taken  up  when 
the  estimate  is  made.  Another  thing  to  be  considered  in 
the  foundry  business  is  that  small  pieces  require  more 
melted  iron  to  produce  a  ton  of  castings  than  do  large 
pieces,  for  a  larger  part  goes  back  to  be  remelted  and 
this  is  an  item  worth  looking  into. 

If  a  contract  is  made  to  furnish  a  customer  with 
whatever  castings  he  requires,  the  cost  may  be  considered 
in  one  lot,  that  is,  charge  the  job  with  everything  used 
on  it.  It  must  be  remembered,  however,  that  unless  the 
castings  are  ordered  in  the  same  proportion,  they  are 
figured  in  the  estimate,  that  is,  for  the  same  number  of 
pieces  of  each  kind  the  cost  is  apt  to  be  unsatisfactory 


AND  SELLING  COSTS  11 

and  this  naturally  leads  to  the  subdivision  of  a  job,  the 
grouping  of  certain  pieces  and  figuring  costs  on  them 
together. 

FOLLOW-UP 

To  keep  an  account  showing  the  location  of  all  parts 
in  process  from  the  time  they  are  started  until  assembled 
requires  extra  labor,  but  the  results  will  in  many  instances 
warrant  that  being  done.  In  a  bicycle  factory,  which  will 
serve  as  an  illustration  as  well  as  anything  else,  the  num- 
ber of  parts  is  so  large  that  a  system  is  required  to  keep 
them  moving  through  the  factory  and  the  following  plan 
was  used : 

The  order  department  issued  shop  orders  for  the 
different  parts  required  and  in  the  superintendent's  office 
a  book  was  kept,  one  page  of  which  was  used  for  each 
part  ordered  and  the  pages  were  large  enough  to  take 
care  of  a  season's  orders  in  most  cases.  The  number  of 
columns  in  a  page  provided  one  for  each  operation  of  the 
part  and  the  names  of  the  operations  were  written  in  the 
proper  columns  when  the  order  was  placed. 

Take  as  an  illustration  a  rear  sprocket  of  which  say 
1000  7-tooth  3/1 6"  were  ordered.  On  arrival  of  the 
Shop  Order  in  the  superintendent's  office  auxiliary  orders 
would  be  made  out,  one  for  each  foreman  having  any 
work  to  do  on  the  lot  and  one  of  these  would  be  sent  to 
the  punch  room  to  start  work  on  the  job,  the  original 
being  kept  in  the  superintendent's  office  to  be  filed  after 
entering  it  in  the  stock  book.  Each  foreman  then  knows 
how  much  work  he  has  in  view,  although  some  time  will 
elapse  between  the  receipt  of  the  order  and  the  receipt  of 
the  partly  finished  material.  If  the  order  is  marked 
"Rush,"  part  of  the  sprockets  may  be  taken  from  the 
press  and  hurried  through  the  other  operations,  but  in 


12  MANUFACTURING  COSTS 

every  case  deliveries  from  one  department  to  another 
must  be  signed  for.  A  ticket  similar  to  the  accompany- 
ing form  is  made  out  in  triplicate  and  the  department 
receiving  them  is  required  to  sign  for  them. 

Once  a  day  these  tickets  are  written  up.  That  is,  they 


NO. DATE. 


DELIVERED  TO  DELPT. 


THE    FOLLOWIN6 


DEPT.  FOREMAN 


RECEIVED  BX 


FORM  FOR  TICKET  FOR  DELIVERIES  FROM  ONE  DEPART- 
MENT TO  ANOTHER. 

are  entered  on  the  proper  auxiliary  order  by  the  depart- 
ment delivering  them  and  are  also  placed  in  the  "received" 
column  of  the  order  in  the  department  receiving  them. 
One  copy  of  the  receipt  is  left  in  the  box  of  parts  and 
the  stub  is  retained  in  the  foreman's  book.  Two  of  these 
books  are  provided  for  each  department  and  one  is  in  use 


AND  SELLING  COSTS  13 

there  while  the  other  is  in  the  office  being  written  up, 
that  is,  while  the  entries  are  being  made  on  the  stock  book 
to  keep  this  record  up  to  date.    This  plan  keeps  an  accu- 
rate record  of  each  part  being  made  and  gives  the  location 
of  these  parts  at  all  times.     If  7  T  3/16  sprockets  are 
required,  the  superintendent  can,  by  looking  at  the  stock 
book,  see  at  a  glance  the  number  coming  through,  when 
the  order  was  placed  and  the  present  location  of  the  parts. 
Thus  there  is  no  evading  the  main  issue  by  a  fore- 
man.   If  he  states  that  the  goods  have  left  his  department, 
he  must  prove  his  statement  by  his  receipts.    A  "chaser" 
could  be  used  to  good  advantage  in  this  system  and  it 
would  be  his  duty  to  go  through  the  factory  daily  and 
hurry  along  the  parts  most  needed.     The  tickets  in  the 
boxes  will  show  him  when  material  was  delivered  and 
how    long   it   has   lain   in   a   department   without   being 
worked  on.    It  is  not  necessary  to  deliver  all  the  auxiliary 
orders  as  soon  as  they  are  made  out  in  the  superintend- 
ent's office.     On  the  contrary,  it  will  be  a  good  plan  to 
hold  them  in  some  cases  and  let  the  parts  go  as  far  as 
necessary  and  then  put  them  in  the  stock  room.     This 
eases  up  on  some  departments  which  can  run  during  the 
dull  months  of  the  year  on  material  which  it  is  not  neces- 
sary to  finish  until  1-ater.     Some  trouble  may  be  experi- 
enced in  starting  a  system  of  this  kind  in  a  factory  where 
foremen  have  been  allowed  to  do  pretty  much  as  they 
liked,  but  once  it  is  understood  that  the  new  plan  has 
come  to  stay,  there  will  be  but  few  who  will  not  get  in 
line.    There  is  no  good  reason  why  it  cannot  be  made  to 
work  in  any  kind  of  business.   Foremen  will  be  more  alert 
if  they  know   that   an   absolute   check   is   kept   on   their 
departments. 

LABOR 

Since  labor  is  one  of  the  most  important  parts  of 
cost,  it  requires  a  great  deal  of  care  on  the  part  of  the 


14  MANUFACTURING  COSTS 

manufacturer  to  record  it  properly.  A  record  should  be 
kept  of  every  employe  and  the  accompanying  form  shows 
in  substance  the  information  usually  required  on  records 
of  this  kind.  The  employe  should  sign  this  record,  so 
that  if  necessary  to  identify  his  signature  at  any  time  the 


RECORD  OF  EMPLOYES 


No. 


NAME 


ADDRESS 


AGE 


OR  SINGLE. 


PREVIOUSLY  EMPLOYED  W»TH 


DISCHARGED        REASON 


DATE  EMPLOYED      |QuiT 


REMARKS 


SIGNATURE 


card  may  be  referred  to.  Any  information  peculiar  to 
the  requirements  of  a  business  may  be  incorporated  in 
these  records  as  desired.  The  employe's  value  is  deter- 
mined to  a  great  extent  by  the  amount  of  supervision  he 
requires.  There  are  some  men  who,  when  a  job  has  been 
given  them,  take  entire  care  of  the  matter  from  that  time 
on,  getting  the  work  out  in  the  proper  way  and  at  the 
proper  time.  These  men,  on  account  of  requiring  little 


AND  SELLING  COSTS  15 

supervision,  are  more  valuable  than  men  who  have  to  be 
constantly  watched  and  directed  as  each  new  step  with 
the  work  is  taken.  They  receive  more  pay  because  they 
are  worth  more. 

METHODS  FOR  PAYMENT 

The  various  methods  used  in  paying  employes  are 
considered  under  the  following  heads : 

1.  Day  work. 

2.  Piece  work. 

3.  Premium  plan. 

4.  Contract. 

5.  Profit  sharing. 

A  great  many  of  the  manufacturing  establishments 
of  the  present  time -are  using  the  day  work  plan.  This  is 
simply  paying  the  employe  a  certain  amount  for  a  speci- 
fied number  of  hours  spent  in  the  factory,  with  no  stipu- 
lations as  to  just  how  much  work  is  to  be  done  during 
that  time.  Of  course,  if  a  man  shirks  to  any  great  extent 
and  is  discovered,  he  loses  his  job.  Wages  are  fixed 
according  to  the  class  of  work  done  and  in  the  different 
classes  according  to  the  value  of  the  man.  The  amount 
of  work  he  turns  out  determines  what  pay  he  shall  receive, 
as  it  is  only  fair  to  give  the  alert  and  thorough  workmen 
more  than  the  slow  one. 

This  plan  requires  a  large  amount  of  help  to  super- 
vise and  direct  the  workmen  and  much  of  this  time  is  taken 
up  in  seeing  that  each  employe  is  kept  busy.  If  a  day 
worker  runs  out  of  work,  the  temptation  to  stand  around 
until  he  is  given  something  else  to  do  is  sometimes  too 
strong  to  be  resisted. 

PIECE  WORK 

The  piece  work  plan  places  a  price  on  each  operation 
or  piece  manufactured  and  the  employe  is  paid  according 


16  MANUFACTURING  COSTS 

to  the  number  of  pieces  he  turns  in.  In  some  cases  he  is 
charged  for  the  pieces  he  spoils.  The  temptation  to  slight 
the  work  is  so  great  that  a  rigid  inspection  system  must 
be  installed  where  this  plan  is  used,  in  order  to  see  that 
the  count  is  correct  and  that  the  work  is  properly  done. 
This  plan  should  result  in  more  money  for  the  workman 
since  there  is  an  incentive  for  him  to  speed  up,  and  it  also 
benefits  the  employer  by  increasing  the  production  without 
adding  to  the  manufacturing  expense,  thus  decreasing 
cost  and  increasing  profit.  The  employer  who  sees  his 
workmen  making  more  than  their  day  work  rate  is  some- 
times tempted  to  cut  prices  and  the  employe  puts  on  more 
steam  and  will  make  possibly  as  much  as  before,  which 
results  in  another  cut.  When  the  price  gets  so  low  that 
in  spite  of  his  extra  exertion  the  workman  can  make  but 
little  if  any  more  than  regular  pay  while  on  day  work,  he 
naturally  gets  discouraged  and  quits  and  the  next  man  on 
the  job  may  have  to  be  given  day  work  in  order  to  get 
the  work  done  at  all. 

Cutting  piece  prices  spoils  all  the  good  there  is  in 
this  system,  for  if  the  workman  thinks  that  to  turn  in  a 
big  day's  work  is  to  invite  a  cut  in  prices,  he  will  naturally 
stay  on  the  safe  side  and  do  only  enough  to  avoid  a  cut. 
In  establishing  piece  work  prices  it  is  advisable  to  run 
through  a  lot  of  "day  work"  and  from  the  results  of  this 
determine  on  a  price  for  the  operations,  and  once  such  a 
price  is  established,  do  not  change  it.  Of  course,  this 
cannot  be  done  in  every  instance,  but  the  man  who,  by 
reason  of  his  ability,  is  able  to  earn  more  than  another,  is 
werth  it  and  the  firm  employing  him  can  well  afford  to 
pay  it. 

PREMIUM  PLAN 

The  premium  plan  is  that  arrangement  whereby  an 
employe  receives,  in  addition  to  the  wages  paid  him,  an 
extra  amount  for  doing  more  than  what  has  been  named 


AND  SELLING  COSTS  17 

as  a  day's  work,  or  for  completing  a  task  in  less  than  the 
specified  time.  The  proportion  of  factories  using  this 
plan  is  not  large,  yet  it  possesses  some  very  attractive 
features. 

CONTRACT  WORK 

It  is  doubtful  if  contract  work  in  factories  is  ever  of 
much  benefit  to  the  manufacturer.  To  be  sure,  it  releases 
him  to  a  certain  extent  from  supervising  the  work,  but 
he  more  than  pays  for  this  item  in  the  contract  price,  as 
the  contractor  is  rarely  satisfied  unless  he  is  making  more 
than  a  foreman. 

To  maintain  that  the  contract  system  is  of  advantage 
to  the  manufacturer  is  to  admit  that  the  contractor  has 
better  executive  ability  and  can  manage  men  to  better 
advantage  than  the  regular  foreman  or  superintendent 
can,  an  admission  which  few  proprietors  would  care  to 
make.  The  most  noticeable  disadvantage  in  this  system 
is,  that  it  prohibits  a  knowledge  of  the  cost  of  different 
operations  being  known.  A  certain  price  is  paid  for 
doing  a  number  of  different  things  and  to  figure  out  just 
what  is  paid  for  each  is  practically  impossible,  and  with- 
out an  absolute  knowledge  of  the  cost  of  each  operation 
no  concern  is  getting  value  received  from  its  cost  depart- 
ment. 

TIME 

One  of  the  best  Time  systems  for  taking  care  of  the 
time  of  employes  in  the  factory  is  to  have  a  timekeeper 
in  each  department,  whose  duty  it  is  to  furnish  a  man 
with  a  ticket  each  time  a  job  is  started,  which  shows  the 
name  or  number  of  the  job,  the  time  commenced  and 
when  the  ticket  is  turned  in  the  time  completed  is  noted 
thereon.  These  tickets  may  'be  assorted  daily  as  to  job 
numbers  and  after  the  cost  of  the  jobs  is  figured  they  may 
be  rearranged  by  the  timekeeping  department  and  entered 


18  MANUFACTURING  COSTS 

on  the  time  book.  Machines  may  be  purchased  to  do  much 
of  the  detail  work  in  time  keeping-  and  cost  accounting, 
and  where  the  size  of  the  plant  or  the  volume  of  work 
turned  out  makes  it  possible  to  use  them,  they  are  very 
economical  besides  being  absolutely  accurate. 


WORKMAN'5  NO. 


NAME 


JOB  NO. 


NAME 


OPERATION 


TIME  STARTED 


NO.  PIECES 


Tine  FINISHED 


PRICE  PER  PIECE 


TIME  WORKED 


TOTAL 


DATE 


OK 


FOR    INDIVIDUAL    JOB    RECORD 

CLASSIFICATION  OF  MATERIAL 

Material  for  an  article  should  only  be  drawn  from 
the  stock  room  on  a  requisition  properly  signed  by  the 
foreman,  which  gives  the  required  information  regarding 
the  transaction.  These  tickets  should  be  taken  to  the 
office  daily  and  entered  in  the  stock  book,  form  7.  The 
tickets  may  then  be  assorted  according  to  the  job  num- 


AND  SELLING  COSTS  19 

hers  or  articles  to  be  charged,  so  that  if  it  is  necessary 
to  know  the  charges  against  a  job  the  tickets  may  be 
found  all  together.  The  stock  book  is  merely  a  perpetual 
inventory  and  once  a  month  it  is  figured  up  and  the 


DELIVER  TO 

STOCKROOM   T'lCttET 
DATE.     .                              _      _. 

BEARER   THE  FOLLOWING    MATERIAL 

CHARGE  TO 

FOREMAN 

RECEIVED 

BY 

FORM  6,  FOR  STOCK  ROOM  REQUISITION. 

balance  brought  down,  although  balances  may  be  brought 
down  more  often  if  desired. 

The  clerk  keeping  this  book  should  be  required  to 
hand  in  monthly  a  classification  of  charges  which  shows 
the  various  accounts  to  be  charged  for  material  drawn 
and  the  amount  of  such  charges.  Form  8.  A  classifica- 
tion of  the  time  is  made  monthly  by  the  timekeeper  on 
the  same  form  and  these  forms  may  be  placed  in  binders 


20 


MANUFACTURING  COSTS 


UNIT 
ARTICLE  MINI  HUN  STOCK  ACCOUNT 

USED 

CHARGE  TO 

VALUE 

UliNVno 

DATE 

BALANCE 

VALUE. 

> 
t— 

Et 

*D  ~Z- 

K 
S 

*± 

RECEIVED  FROM 

UJ 

| 

Q                     V 

AND  SELLING  COSTS 


21 


CLASSIFICATION 

Cartage 

.Mnnuf'g  Expense,  Factory 

Wood  Shon 

OHice  Expense 

rower  Account.  Fuel  nnd  Oil 

Operation 

Repairs 

AmoiiDt  Forwerd 

FORM  8,  FOR  MONTHLY  CLASSIFICATION   OF  TIME. 


22 


MANUFACTURING  COSTS 


and   used   as   journals,   which   makes   it   unnecessary   to 
copy  them  into  the  regular  journal. 


ESTIMATE  a  COST  SHEET                 UNH 
ARTICLE                                                                             DATE 

r 

. 

TOTALS 

ESTIMATES 

In  order  to  know  positively  whether  or  not  a  cost 
on  an  article  is  as  low  as  it  should  be,  it  is  necessary  to 
refer  to  the  estimated  cost  sheet.  Each  cost  figured  might 
be  lower  than  any  of  the  preceding  costs  and  still  be  too 
high.  Some  goods  afford  a  larger  profit  than  others,  but 
this  is  no  reason  why  the  cost  should  not  be  accurately 
known. 

Guesswork  has  no  place  in  the  figuring  of  costs  and 
the  estimate  should  never  be  used  as  a  substitute  for 
them.  It  is  auxiliary  to  the  cost  and  while  not  of  equal 


AND  SELLING  COSTS  23 

importance  perhaps,  it  yet  serves  as  a  check  on  costs 
which  are  too  high.  In  making  up  an  estimate  a  blank 
form  should  be  used  which  has  four  or  five  columns. 
These  may  be  headed  Material,  Labor,  Expense  and  Total 
and  if  the  item  of  expense  needs  to  be  considered  in 
classes,  extra  columns  may  be  provided  for  that  purpose. 

As  the  first  column  is  for  material,  the  footing^  of  this 
column  represents  the  cost  of  the  material  in  the  article 
and  the  footings  of  the  other  columns  show  in  turn  just 
'how  much  labor,  manufacturing  expense,  etc.,  should  go 
into  the  cost. 

To  illustrate,  take  a  low  pressure  cast  iron  boiler  that 
is  used  for  heating  houses.  The  steam  dome,  we  will  say, 
weighs  300  pounds  which,  at  a  cost  of  one  cent  per  pound, 
gives  three  dollars  ($3.00)  to  place  in  the  first  column. 
This  piece  requires  a  certain  number  of  chaplets,  a  certain 
amount  of  core  sand  and  core  oil  or  compound.  The 
value  of  all  these  is  entered  under  material.  Possibly  this 
is  all  the  material  in  this  piece,  so  that  the  total  shows 
what  should  be  figured  for  material. 

Some  founders  charge  the  cost  of  core  sand  to 
Foundry  Manufacturing  expense,  rather  than  try  to 
figure  the  amount  used  on  each  casting  or  job,  but  to  do 
this  is  to  charge  indirectly  a  portion  of  the  expense  to 
castings  that  require  no  cores  which,  of  course,  gives 
misleading  and  inaccurate  costs,  too  high  on  some  cast- 
ings, too  low  on  others,  although  the  average  cost  may  be 
the  same.  The  labor  of  making  the  cores  and  the  cost  of 
molding  can  be  estimated  and  placed  in  the  labor  column 
and  a  certain  percentage  of  the  labor  cost  or  of  the  labor 
plus  material  is  computed  and  placed  in  the  expense 
column,  while  the  total  of  the  three  columns  for  the  dome 
is  placed  in  the  fourth  column  under  the  head  of  Total. 

This  plan  is  followed  on  each  part  of  the  heater  and 
the  total  cost  of  each  part  gives  a  basis  to  figure  what 


24  MANUFACTURING  COSTS 

repairs  shall  be  sold  for,  and  an  estimate  figured  in  this 
way  permits  a  thorough  analysis  of  the  cost  to  be  made, 
should  it  be  necessary.  The  average  weight  of  a  section 
may  be  found  easily,  but  it  is  better  to  know  what  the 
weight  should  be  than  to  know  only  what  it  is:  By  com- 
puting the  cubic  contents  of  a  casting  and  adding  a  per- 
centage for  strain,  an  approximate  weight  may  be  found. 
Some  molders  will  make  castings  year  after  year  from  a 
set  of  patterns  and  there  will  be  little  loss  and  only  a 
slight  variation  in  weight.  Put  another  man  on  the  job 
and  the  loss  may  be  greater  and  the  castings  much 
heavier,  as  he  is  not  as  good  a  workman  and  finds  it 
easier  to  file  the  core  than  to  set  his  chaplets  or  arbor 
correctly.  It  is  not  considered  good  practice  to  figure 
that  castings  ought  to  weigh  a  certain  amount  and  then 
use  these  figures.  Weights  are  better  than  estimates  and 
then  call  the  matter  to  the  attention  of  somebody  respon- 
sible if  the  castings  are  running  heavy. 

The  cost  clerk  in  making  up  an  estimate  should  get 
his  labor  costs  from  the  foreman  or  superintendent,  since 
they  are  best  fitted  to  furnish  information  of  that  kind. 
There  is  often  a  similarity  of  operation  which  must  be 
considered  to  arrive  at  reasonable  estimates  and  it  is  of 
course  up  to  the  factory  to  keep  its  part  of  the  cost  within 
the  estimate.  There  may  be  instances  where  this  cannot 
be  done,  but  if  it  is  given  proper  attention  there  is  little 
chance  for  error.  The  subject  of  estimates  is  considered 
by  some  to  be  a  superfluous  operation,  a  waste  of  time, 
giving  results  misleading  and  inaccurate.  I  hold  that  on 
the  contrary  the  estimate  as  outlined  herein  is  only 
exceeded  in  usefulness  by  the  cost  itself  and  that  it  is  a 
check  on  the  cost  which  can  be  secured  in  no  other  way. 


AND  SELLING  COSTS 


25 


TIME  CARDS 

The  time  card  form  is  commonly  used  iu  taking  up 
the  time  of  employes.     One  is  taken  from  a  supply  by 


No,                                                                 DATE 

NAME 

No, 

OPERATION 

H 

M 

Total 

•— 

= 

FORM  FOR  TIME  CARD. 

each  man  on  going  to  his  work  in  the  morning  and  is 
turned  in  by  him  at  night  filled  out. 

This  permits  the  employe  to  keep  his  own  time,  which 
is  not  a  good  plan,  for  the  reason  that  he  is  apt  to  get 
careless  and  inaccurate  and  again  the  time  spent  by  him 
in  making  out  the  cards  could  be  spent  to  better  advantage 
if  some  other  plan  for  taking  a  record  of  the  time  were 
in  use. 


26 


MANUFACTURING  COSTS 


Another  plan  is  to 
through  the  factory  daily 
and  record  the  time  direct- 
ly in  the  time  book.  This, 
too,  is  inaccurate,  as  the 
employe  cannot  always  re- 
member the  jobs  he  was 
working  on  the  day  before 
arid  if  he  does  remember, 
he  cannot  give  the  actual 
amount  of  time  spent  on 
each.  Of  course,  where 
time  cards  are  used,  the 
time  must  be  copied  from 
them  to  the  time  book  and 
the  name  of  the  workmen 
and  amount  due  has  to  be 
copied  into  the  pay  roll 
book.  Some  factories  use 
a  combined  pay  roll  and 
time  book  form  which 
makes  it  necessary  to  write 
the  name  of  an  employe 
only  at  intervals  of  from 
one  to  twelve  times  per 
year  and  further  provides 
for  a  monthly  classification 
of  the  time,  by  having  a 
column  for  each  account 
which  is  to  be  charged. 


have     the     timekeeper     go 


AND  SELLING  COSTS 


FORM    FOR  FOUNDRY  TIME  BOOK. 


28  MANUFACTURING  COSTS 

This  is  an  excellent  plan  when  it  can  be  used,  but  in 
the  factory  having  a  large  number  of  accounts  on  the 
general  ledger,  the  book  would  have  to  be  so  large 
that  its  other  good  points  would  be  defeated  by  its  cum- 
bersomeness.  It  is  not  a  difficult  job  to  classify  a  month's 
time  in  the  average  factory  if  it  is  gone  about  in  the  right 
way.  In  truth,  it  is  often  a  saving  of  time  to  handle  the 
time  by  means  of  separate  books  for  timekeeping  and  pay 
roll,  instead  of  attempting  to  use  a  combined  book  for  the 
two,  which  necessarily  wastes  a  great  deal  of  paper  and 
usually  much  time. 


COST  OF  MATERIAL 

The  cost  of  material  for  an  article  is  the  value  of 
whatever  stock  it  takes  to  build  it  Less  the  value  of  the 
waste  or  left-over  pieces,  providing  this  material  has  a 
value. 

The  lumber  used  in  a  table  might  cost  $3.00,  but 
owing  to  the  peculiar  shape  of  some  of  its  parts  there 
might  be  left-over  pieces  which  would  be  worth  twenty- 
five  cents  in  the  manufacture  of  other  articles.  The  cost 
of  the  lumber  for  that  table  is  then  $2.75  and  it  should  be 
figured  at  this  rate  so  long  as  the  scrap  pieces  represent 
a  value  of  twenty-five  cents.  In  the  manufacture  of  other 
things  it  will  sometimes  be  found  that  there  is  nothing 
left  over  which  can  be  used,  but  these  cases  are  unusual 
and  the  wise  manufacturer  will  see  that  this  question  is 
given  proper  attention  by  the  cost  department. 


AND  SELLING  COSTS 


29 


Expense 


Office 


Factory  or 
Manufacturing 


General 


f      Cost  department,  purchas- 

I  ing   department,   and   what- 

•j  ever  other  labor  and  material 

is     required     in     the     office 

chargeable  to  manufacturing. 

This  expense  may  be  con- 
sidered under  the  heads  of 
the  various  departments,  an 
account  being  kept  for  each 
as  Wood  Shop  expense, 
Foundry  expense,  and  this  is 
borne  by  the  production  of 
the  department  in  which  it  is 
incurred  and  not  necessarily 
by  every  article  made. 

f  Items  of  expense  such  as 
rent,  heat,  light,  depreciation, 

<(  taxes,  etc.,  a  part  of  which 
is  to  be  apportioned  to  every 
article  manufactured. 


CHART  SHOWING  THE  DIVISIONS  WHICH  MAY  BE  MADE  OF 
EXPENSE  INCIDENT  TO  THE  MANUFACTURING  OF  AN 
ARTICLE.  SELLING  EXPENSE  IS  NOT  CONSIDERED,  AS 
IT  IS  AN  EXPENSE  TAKEN  CARE  OF  SEPARATELY. 


CLASSIFICATION  OF  OFFICE  EXPENSE 

The  various  expenses  are  chargeable  with  the  cost 
of  operating  the  office. 

Some  clerks  work  on  manufacturing  work  entirely. 
Others  are  taking  care  of  the  sales  and  some  devote  a 
3 


30  MANUFACTURING  COSTS 

portion  of  their  time  to  each  of  these  departments  in  turn. 
The  classification  of  office  expense  then  should  provide 
for  both  of  these  and  as  many  other  accounts  as  are 
thus  affected. 

The  manufacturing  cost  should  be  kept  in  one  account 
and  the  selling  expense  distributed  over  the  goods  sold 
and  shipped  and  at  inventory  time  the  selling  expense  on 
goods  sold  but  not  shipped,  may  properly  be  considered 
an  asset,  as  is  also  unexpired  insurance  and  other  matters 
of  that  class. 

Manufacturing  expense  may  be  termed  the  expenses 
incident  to  the  manufacture  of  goods  and  selling  expense, 
the  expense  incident  to  their  sale.  Up  to  the  time  goods 
reach  the  shipping  room  they  are  subject  to  various  man- 
ufacturing expenses,  but  after  this  time  the  selling 
expense  is  usually  considered,  although  there  is  a  differ- 
ence of  opinion  as  to  where  one  ends  and  the  other  begins. 
Goods  in  the  shipping  room  are  subject  to  expense,  but 
their  value  is  not  increased  by  them.  Rent,  insurance  and 
other  things  are  an  expense  which  must  be  taken  care  of, 
but  should  not  be  added  to  the  cost  of  the  goods. 

SYSTEM 

''System  is  order"  and  whatever  forms  or  methods 
are  used  to  maintain  this  condition  may  be  rightfully 
called  systematic  and  whatever  tends  to  confusion,  inac- 
curacy or  incompleteness  is  not  deserving  of  the  name 
System. 

The  institution  having  the  most  elaborate  records  is 
not  necessarily  the  most  systematic.  Real  System  aids  in 
the  transaction  of  business.  It  is  not  a  hindrance  as  many 
so-called  systems  are.  Many  houses  are  keeping  two  sets 
of  records  where  one  could  be  made  to  do  the  work  more 
satisfactorily  by  a  rearrangement  of  the  forms. 

A  cost  system  should  have  just  as  few  different  forms 


.VXD  SELLING  COSTS  31 

as  will  properly  handle  the  matters  under  consideration 
and  the  cost  system  should  work  in  with  the  books  of 
the  concern.  In  truth  they  should  be  merely  auxiliary 
books,  which  give  in  detail  the  information  found  in  totals 
in  the  ledger.  Considered  in  another  way,  a  cost  sheet 
is  merely  a  transcript  from  the  various  books  used  in  the 
accounting  department  of  a  business. 

COST  BY  LOTS 

In  this  method  of  figuring  costs  a  cost  is  figured  on 
the  completeness  of  each  lot  which  comes  through  the 
factory.  A  certain  quantity  is  ordered  from  the  factory 
and  the  material  necessary  to  make  it  is  drawn  from  the 
stock  room. 

When  the  order  has  all  been  run  through  there  will 
usually  be  a  few  parts  on  hand  which  cannot  be  assem- 
bled, owing  to  shortage  of  other  pieces  caused  by  break- 
age, etc.  An  inventory  of  these  is  taken  and  when  the 
cost  is  figured  their  value  is  deducted  from  the  total 
charges  shown  by  the  ledger.  The  balance  is  the  net  cost 
and  having  this  it  is  easy  to  find  the  amount  made.  The 
stock  book  furnishes  that  information  and  the  cost  per 
unit  is  easily  found. 

By  lettering  the  lots  Lot  A,  Lot  B,  etc.,  it  is  possible 
to  start  the  second  lot  before  the  first  is  finished  and  still 
keep  the  costs  separate  and  if  the  work  is  kept  moving 
through  the  factory  in  the  proper  way  there  will  be  no 
boxes,  barrels  or  shop  cars  full  of  partly  finished  material 
side  tracked  and  possibly  overlooked  when  an  inventory 
is  taken. 

The  storeroom  is  the  proper  place  to  keep  material 
which  is  not  being  \vorked  on  and  the  fact  that  a  quantity 
of  parts  is  on  the  shop  floor  should  be  evidence  that  a 
shop  order  for  the  article  of  which  it  is  a  part  has  been 
issued  and  that  it  should  be  kept  moving.  Men  and 


32 


MANUFACTURING  COSTS 


machines  must  be  kept  busy  and  parts  kept  in  motion  if 
the  result  is  to  be  something  worth  while  in  the  way  of 
profit.  The  statement  often  made  that  "No  system  is  so 
good  that  it  cannot  be  improved,"  is  very  true  and  though 
the  cost  keeping  is  done  by  the  cost  clerk,  he  usually  has 
very  little  to  say  about  it,  his  work  being  to  take  the 
information  given  him  and  from  it  to  figure  out  the  costs. 
The  cost  clerk  can  make  suggestions,  however,  if  he  finds 
that  things  are  not  going  as  they  should  and  may  co-oper- 
ate with  the  executive  force  to  the  advantage  of  the  latter, 
if  he  is  properly  encouraged. 

The  various  departments  must  work  in  harmony  to 
secure  the  best  results.  There  are  but  few  problems 
which  cannot  be  solved,  few  difficulties  which  cannot  be 
overcome  by  an  organization  working  in  the  proper  spirit. 
No  friction  should  be  permitted  between  departments. 
There  may  be  friendly  rivalry,  but  friction  produces  wear 
and  means  loss. 

f  (  Labor  Cartage. 

Shipping    \    Packing     material,     other     than 
t        standard  packages. 

Sales  Manager,  Assistants  and  Salesmen  and 
their  expenses. 

Advertising. 

Selling  Expense    \    part    of    Administration    expense    in    some 
cases. 

Commissions. 
Part  of  Postage  account. 
Part  of  Stationery  account. 
I    Mileage  books. 

CHART  SHOWING.  SOME  OF  THE  ITEMS  WHICH  MAKE  UP 
SELLING  EXPENSE.  THE  TOTAL  OF  THIS  EXPENSE 
ACCOUNT  IS  TO  BE  CHARGED  PERIODICALLY  TO  SALES 
ACCOUNT. 


AND  SELLING  COSTS  33 


RO 

JTE  FOR  THIS  WEEK 

COMMENCING  MONDAY 

nONOAV 

CARE 

TUE50AV 

1C 

WEDNESDAY             

.    .       iV 

THURSDAY 

U 

FRIDAY                       

IV 

SATURDAY 

U 
li 

SUN  DAY 

LEAVE.  ONE  OF 

THESE 

EVERY  SATURDAY 

FORM  FOR  SALESMEN  TO  MAIL  WEEKLY  TO  SALES 
DEPARTMENT. 

Chart  showing  some  of  the  items  which  make  up 
selling  expenses.  The  total  of  this  expense  account  is  to 
be  charged  periodically  to  sales  account. 

SOME  ITEMS  OF  INDIRECT  LABOR  EXPENSE 
Expenses  incident  to  the  receipt  and  distribution  of 
material  should  be  charged  to  the  material  delivered  to 
the  factory  on  requisitions.  A  common  way  is  to  appor- 
tion this  expense  over  the  material  delivered,  by  adding 
a  certain  percentage  to  the  cost  of  the  material  to  take 
care  of  this  expense. 

WATCHMAN. — This  item  of  expense  is  properly 
chargeable  to  general  expense  or  that  expense  of  which 
each  article  made  takes  its  proper  share. 

SPECIAL  POLICE. — ^The  superintendent,  engineer, 
firemen,  oilers,  electrician,  gate  tenders  and  timekeepers 
as  well  as  many  others  all  come  under  this  head.  The 
rule  is  that  whatever  item  of  labor  or  material  which 
enters  indirectly  into  an  article  or  which  benefits  the 
whole  plant,  is  to  be  charged  to  an  account  usually  called 


34  MANUFACTURING  COSTS 

General  Expense  and  from  there  distributed  to  the  vari- 
ous departments  and  Stock  in  Process  account. 

A  foreman's  time  is  a  charge  only  against  the  work 
done  in  his  department.  It  is  not  a  general  .expense.  If 
each  department  has  a  sweeper  his  time  should  be 
charged  the  same  as  that  of  the  foreman  and  all  the 
indirect  labor  and  material  used  in  a  department  increases 
the  cost  of  the  articles  produced  in  that  department  and 
in  no  other.  General  Expense  then  is  an  expense  which 
must  be  borne  by  each  part  of  the  plant  in  proportion  to, 
the  benefits  received,  the  space  occupied  or  on  some  other 
basis  of  distribution,  while  Machine  Shop  expense  goes 
no  further  than  the  machine  shop. 

Pattern,  Tool,  Machine  or  Repair  Order. 

Order  No.  0   6997 

[Foreman _ 190 

Rep.acement        ' 

Make 


IMPORTANT. 


All  labor  and  material 
used  on  this  order  must  be 
charged  to  t  h  e  ORDER 
NUMBER. 

—  All-tabor  an«t- -material 
must  be  itemized  on  the 
back  of  this  order,  and 
must  agree  with  items 
charged  to  this  number  on 
time  books,  stock  reports, 
and  Invoices. 

Return  this  order  to  the 
superintendent  whe  the 
work  is  completed. 


ICh.rge  .T.ryihi 
number,  not  (o  the  , 


»  tbe  order 
!  ol  the  job. 


Charge- 


Supt. 


Order  Completed 

Foreman 


190 


Correct Supt. 


EXPERIMENTAL  WORK,-  DESIGNING,  ETC. 

The  charges  for  experimental  work  in  a  factory  are 
not  always  easy  to  apportion  correctly.  In  some  cases 
it  is  all  loss  and  in  others  something  is  added  to  the  assets. 
Because  the  designing  department  is  located  in  the  pat- 


AND  SELLING  COSTS 


35 


Report  of  Labor  and  Material  Used  on  this  Order. 


DATE 

NAME  OF  WORKMAN  AND 
DESCRIPTION  OF  MATERIAL 

NO.  OF 

HOURS 

RATK 
PEN 

HOUK 

TOT  A  I, 
I.AtOK  OR 
MATERIAL 

. 

TOTAL  COST 

SHOWING   BACK   OF  FORM    15. 


36  MANUFACTURING  COSTS 

tern  room  is  no  reason  why  the  pattern  room  should  have 
the  expense  of  its  maintenance. 

It  is  a  good  plan  to  issue  special  orders  for  that  work 
and  when  it  is  completed  charge  the  amount  it  has  cost 
to  the  accounts  that  should  stand  the  expense.  If  a  special 
jig  is  designed  for  a  machine  of  which  thousands  are  to 
be  made,  the  disposition  of  the  charge  will  be  entirely 
different  from  when  the  tool  is  required  only  on  a  special 
order.  A  manufacturer  must  get  the  cost  of  special  tools, 
drafting,  designing,  etc.,  out  of  the  goods  made  on  the 
first  order  or  he  will  NEVER  get  it.  If  this  work  is 
required  for  articles  regularly  made,  the  handling  is 
entirely  different. 

Some  manufacturers  charge  the  cost  of  this  work  to 
the  Stock  in  Process  account  of  the  article -it  is  for  and 
when  it  shows  up  in  the  cost,  make  allowance. for  it ;  that 
is,  figure  what  the  cost  would  be  without  it. 

PATTERNS 

As  a  rule  patterns  are  assets  and  should  be  treated 
as  such.  Thus,  the  patterns  required  for  an  article  to  be 
manufactured  would  be  charged  to  the  pattern  account 
of  that  article. 

The  charges  are  thus  where  they  will  not  confuse 
anybody  in  figuring  costs  and  confusion  might  easily  hap- 
pen if  the  patterns  were  carried  in  the  Manufacturing  or 
Stock  in  Process  account  of  the  article.  Repairs  or  replace- 
ments are  proper  charges  to  expense  accounts  and  these 
repairs  or  replacements  should,  as  a  rule,  maintain  the 
actual  or  insurable  value,  so  that  little  or  no  depreciation 
will  have  to  be  charged  off  from  the  pattern  accounts.  In 
case  a  pattern  becomes  out  of  date  and  is  no  longer  to  be 
used,  it  should  be  charged  off  the  books,  as  it  has  ceased 
to  be  an  asset.  If  the  manufacture  of  an  article  should  be 
discontinued,  there  would  be  no  further  use  for  the  tools, 


AND  SELLING  COSTS 


patterns,  etc.,  and  either  all  or  part  of  their  value  should 
be  charged  off,  the  amount  depending  in  every  case  on  the 
circumstances  surrounding  each  transaction.  If  the  article 
is  never  to  be  made  again  and  it  is  not  desired  or  is  not 
possible  to  sell  the  patterns,  they  should  be  "scrapped" 
and  whatever  they  are  worth  as  old  material  is  all  the 


PATTERN 

NAME 

RECORD 

NO.                    I  NO.  PCS. 

NO.    CORE 
BOXE.S 

NO.   CARDS 

COST       U       || 

REMARKS 

DAT  E 

S5  t  IN      1         1    U 

V  I  f\ 

i  OAT  E 

- 

value  they  represent  and  the  balance  should  be  charged 
off.  There  is  nothing  made  by  declaring  dividends  on 
material  of  this  kind,  which  is  really  what  it  amounts  to, 
if  the  proper  disposition  is  not  made.  There  will,  of 
course,  be  some  patterns  which  cannot  be  treated  in  the 
way  mentioned.  For  instance,  a  pattern  of  a  jig  is  made 
for  some  special  work,  which  will  never  be  needed  again.' 


38  MANUFACTURING  COSTS      • 

In  such  case  the 'whole  cost  should  be  charged  to  the  job. 
In  bidding  on  work  which  requires  special  tools  or 
patterns,  their  cost  must  be  included  in  the  price  quoted, 
either  as  a  separate  charge  or  included  in  the  lump  sum 
price  or  price  per  unit.  It  makes  little  difference  how  it 
is  done,  so  long  as  it  IS  done.  In  making  patterns  the 
expense  or  burden  is  not  so  great  as  in  many  other  parts 
of  the  factory,  and  this  should  be  taken  into  consideration 
when  making  up  the  basis  of  apportionment.  The  pattern 
expense  rarely  includes  any  item  of  material,  since  prac- 
tically every  nail  and  screw  can  be  charged  directly  to  the 
job  on  which  it  is  used  and  not  as  expense  to  be  appor- 
tioned over  the  entire  product  of  the  room.  It  is,  there- 
fore, advisable  to  have  an  account  for  pattern  room 
expense,  which  will  of  course  be  charged  with  its  proper 
share  of  Heat,  Power,  etc.,  but  which  will  not  have  to 
bear  any  of  the  material  expense  of  other  departments. 
The  head  pattern  maker,  except  in  larger  shops,  can  divide 
his  time  among  the  different  jobs  better,  as  a  rule,  than 
the  cost  keeper  can,  by  charging  it  all  to  expense  and 
afterwards  distributing  it  over  the  various  orders.  This 
must  be  determined  by  each  manufacturer  for  himself, 
as  no  absolute  rule  can  be  made. 

NAME  OF  ACCOUNT 
Debit  Credit 

STORES  ACCOUNT 


Debit  for  all  material  re- 
ceived which  is  to  enter  into 
manufactured  stock  later. 


Credit  for  value  of  what- 
ever drawn  from  stock  room 
at  cost  plus  expense  of  han- 


dling. 
LABOR 


Charge  for  all  wages  paid 


,to  employes. 


Credit  as  charged  to  the 
different  expense  and  stock  in 
process  accounts. 


AND  SELLING  COSTS 


39 


Charge  for  total  amount 
delivered  to  stock  room  at  es- 
timated cost  price. 

For  cost  of  returned  goods. 


MERCHANDISE 

Credit    for    sales    at    esti- 
mated cost  price. 


SALES 


Charge    for    merchandise 
sold  at  cost  prices. 

For    selling    expenses 
For  credits. 


Credit  amount  of  sales  as 
shown  by  sales  journal. 


STOCK  IN   PROCESS  ACCOUNTS 


Charge  for  material  fr®m 
stock  room,  labor  from  labor 
account  and  expense  from  each 
of  the  various  expense  ac- 
counts. 


Credit  value  of  goods 
made  and  delivered  to  stock 
room  at  estimated  cost  prices. 


EXPENSE  ACCOUNTS 


Charge  for  labor  and  ma- 
terial constituting  expenses. 


Credit  as  apportioned  to 
stock  in  process  accounts  or 
otherwise  disposed  of. 


The  accompanying  diagram  shows  how  one  factory 
handles  the  various  accounts  relating  to  its  costs. 

The  balance  of  stores  account  shows  the  value  of  all 
stock  remaining  in  the  stock  room.  This  information  is 
given  in  detail  on  the  stock  book  (Form  7).  As  mer- 
chandise is  charged  and  credited  at  cost  prices,  the  balance 
of  this  account  shows  the  value  of  merchandise  on  hand 
and  the  detailed  information  is  given  on  the  stock 
book.  Sales  account  is  handled  in  a  way  which 
permits  the  balance  to  be  considered  as  the  net  profits 


40 


MANUFACTURING  COSTS 


niNiMun 

UNIT 
C05T  PF 

NAMF 

UCE 

DATE 

NO.nADE 

VALUE 

BALANCE. 

DATE 

N0.5HIPPED 

VALUE 

FORM  17. 


AND  SELLING  COSTS  41 

insofar  as  they  can  be  shown  without  consulting  the 
expense  and  profit  and  loss  accounts.  The  balance  on  any 
stock  in  process  account  is  assumed  to  be  equaled  by  the 
value  of  the  material  coming  through  the  factory  until 
an  inventory  is  taken  at  the  close  of  a  lot  and  the  small 
difference  then  found  is  placed  in  adjustment  account. 

Of  course,  the  expense  accounts  are  many  for  this 
particular  factory  and  all  are  closed  monthly  and  charged 
to  the  various  stock  in  process  accounts  and  to  whatever 
other  accounts  are  affected.  It  is  not  necessary  to  do  this 
in  every  factory,  as  a  cost  can  be  figured  by  taking  the 
material  and  labor  charges  and  adding  the  proper  expense, 
but  as  a  rule  a  monthly  distribution  of  expense  to  the  va- 
rious accounts  is  more  desirable,  although  requiring  more 
work.  The  form  (18)  shown  herewith  illustrates  how  the 
net  profit  or  loss  of  a  branch  house  may  be  determined 
monthly  and  has  to  do  with  selling  expense,  only  the 
material  being  billed  to  the  branch  at  certain  prices  which, 
although  not  representing  actual  costs  to  the  home  office, 
represent  the  amount  the  branch  is  supposed  to  pay  for 
them. 

Manufacturing  cost  as  a  rule  goes  no  further  than 
the  shipping  room.  Whatever  expense  is  incurred  in 
marketing  an  article  must  be  added  to  the  manufacturing- 
cost  as  a  selling  expense,  in  effect  at  least. 

If  a  concern  has  a  representative  who  handles  their 
material  in  a  certain  section  of  the  country,  it  is  evident 
that  a  large  part  of  the  selling  expense  is  eliminated  from 
this  transaction,  and  they  can  generally  make  a  much 
lower  price  to  their  representative  than  to  a  customer 
called  on  by  their  own  salesmen  and  at  no  sacrifice  of 
profits.  Where  a  salesman  sells  on  commission  there  is 


42 


MANUFACTURING  COSTS 


fl 


! 


li     i  i  *  *  i  i  I  *  ! 
I  II  I  }  I  *  If  1  I  f 

m5f-<^z-J)twt-a.< 


i 
l.j 

n 


j 

1   i   j  I 

4  1  1  i  I  1 


,  i  m 

•Lil »»!![{    ! 

J 


AND  SELLING  COSTS 


43 


no  guess  work  as  to  his  selling  expense.  It  is  a  known 
quantity.  True,  where  a  salesman  is  working  on  a  salary 
basis  there  is  no  guesswork  about  it,  but  nevertheless  it 
is  a  variable  quantity.  It  may  therefore  be  considered 
good  business  practice  to  tabulate  the  results  and  show 


NAME  OF  SALESMAN 

MONTH 

NET  SALES 

PROFITS 

EXPENSES 

C05T  OF  SELLING 

JANUARY 

THIS 

^fEAR 

LAST 

YEA* 

FEBRUARY 

MARCH 

APRIL 

MAY 

JUNE 

JULY 

AUGUST 

SEPT. 

OCT. 

NOV 

DEC. 

TOTAL  AND 
AVERAGE 

LAST  YEAR 

FORM  FOR  SALESMAN  S  REPORT. 


just  what  salesmen  are  profitable  and  what  are  not. 
This  will  result  in  very  interesting  statistics,  resulting 
usually  in  showing  that  it  is  not  the  cheap  man  who  is 
getting  the  best  results.  The  amount  of  money  spent  by 
a  salesman  is  not  the  only  thing  to  be  considered.  Take 
his  net  sales  for  a  given  period  and  find  out  what  his 
selling  expense  is  in  percentage.  This  is  the  important 


44 


MANUFACTURING  COSTS 


SALESn 

AN 

5 

WE 

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KL- 

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(E 
en 

NS 

E  A 

E 

REF 

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RT 

5 

M 

T 

v^ 

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F 

S 

HOTEL  AT 

fxces-j    0AGOA6E 

S>7~ftEET  CAK    F~A  H  e 

eNTeRT/UKMENT 

POST  AGP  &  T££.  £6ft^wH 

TO  TAUS 

REMARKS 

FORM  FOR  SALESMAN'S  WEEKLY  EXPENSE  REPORT. 


AND  SELLING  COSTS 


45 


thing  to  consider,  although  where  available  the  net  profits 
mav  be  considered  as  well. 


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46  MANUFACTURING  COSTS 

SALESMEN'S  ACCOUNTS 

In  the  majority  of  cases  it  is  a  good  plan  to  open  a 
ledger  account  with  each  salesman,  charging  him  with 
the  amount  advanced  him  for  expenses  and  crediting  him 
for  his  expenditures  as  they  are  O.  K.'d  by  the  sales 
department.  Form  20  is  a  suggestion  for  an  expense 
report  which  gives  in  detail  the  required  information,  a 
common  form  which  may  be  changed  as  required,  in 
fact  some  houses  only  require  a  report  of  this  kind 
monthly. 

It  is  a  common  practice  to  advance  a  salesman  a 
certain  amount  when  he  starts  on  his  first  trip,  the  amount 
being  determined  of  course  by  the  circumstances  in  the 
case,  and  as  soon  as  an  expense  report  is  received  and 
checked  up  the  amount  of  it  is  sent  to  him.  It  is  quite 
essential  that  these  reports  be  sent  in  promptly  at  the 
close  of  the  month,  for  they  are  chargeable  to  selling- 
expense  and  without  them  it  is  of  course  impossible  to 
arrive  at  the  exact  cost  of  selling  for  a  month. 

SHOP  ORDERS 

No  lot  of  goods  should  be  started  in  the  factory  until 
the  proper  production  order  has  been  issued,  and  this 
applies  to  special  work  tools  and  jigs  as  well.  Emergency 
work  is  an  exception  to  this  rule,  but  such  cases  are  not 
of  frequent  occurrence,  and  Form  22  gives  the  informa- 
tion usually  required  on  it.  The  superintendent  may  issue 
auxiliary  orders  to  the  foremen  or  may  simply  tell  them 
what  to  do.  The  size  of  the  business  determines  that,  and 
the  foremen  in  turn  pass  the  instruction  along  to  the 
workmen.  On  completion  the  orders  are  returned  to  the 


AND  SELLING  COSTS 


47 


DAT  E 


MAKE 


19O 


o  ROER  NO.  ___ 


SUPT 


DELIVER   TO 


CHARGE  TIME  AND  MATERIAL   TO- 


TO 


SUPT. 


FORM  22. 


48 


MANUFACTURING  COSTS 


superintendent,  who  O.  K.'s  them  and  sends  them  to  the 
main  office. 

If  the  order  is  for  a  pattern,  new  tool  or  for  repairs,  it 
may  be  given  on  the  special  order  blank  shown  by  Figures 
14  and  15,  but  the  principle  is  the  same.  On  all  orders  ior 
stock  to  be  manufactured,  a  report  should  be  made  daily 
of  all  finished  material  sent  to  the  store  room  and  this 
information  is  noted  daily  on  the  shop  orders  in  the  super- 
intendent's office.  This  report  may  be  on  a  properly  pre- 
pared sheet  which  can  be  sent  to  the  office  to  be  copied 
into  the  stock  book  daily,  and  where  this  is  done  it  is 
essential  that  the  person  receiving  the  goods  sign  the 
report,  showing  that  the  material  has  been  delivered. 


DATE 

ARTICLES  SENT  TO  SHIPPING   ROOM 

DELIVERED  BY 

SIGNED                                                 5HIPPIN6CLERK 

FORM  23. 


It  is  a  good  plan  to  use  tickets  "similar  to  Form  23, 
printed  in  triplicate  and  require  one  of  these  to  be  sent 
with  each  lot  of  finished  goods  sent  to  the  store  room. 
One  is  retained  by  the  person  making  the  delivery  and 


AND  SELLING  COSTS 


49 


one  goes  to  the  office.  Of  course  the  order  department 
should  be  the  source  of  all  orders,  and  another  fact 
equally  important  is,  that  no  order  should  be  started  in 
the  factory  until  all  the  material  is  on  hand  or  in  sight 
for  it.  Having  to  set  up  machines  the  second  or  third 
time  to  finish  a  lot  of  parts  naturally  increases  the  cost. 

INDEXING  ORDERS 

For  indexing  orders  a  book  called  the  Order  Register 
is  used.     The  accompanying  form  gives  the  information 


REGISTER 


OER  CU5T.   NO. 


FORM   24. 

usually  found  on  this  book,  and  for  convenience  in  looking 
up  an  order  number  these  books  may  be  printed  with  fifty 
lines  on  a  page,  one  for  each  order,  and  may  be  numbered 
by  the  printer.  Two  pages  will  then  bear  the  same  num- 
ber at  the  top  and  each  two  pages  be  numbered  from  one 
to  one  hundred  inclusive. 

To  look  up  an  order,  say  number  4012,  open  the  book 


50  MANUFACTURING  COSTS 

to  page  40  and  number  12  will  be  the  order  required.  In 
other  words,  the  page  number  is  the  first  part  of  the 
number  and  the  numbering  in  the  lines  completes  it. 
This  book  is  supplemented  in  many  houses  by  an  order 
index ;  either  cards  or  a  book  may  be  used  for  the  purpose, 
in  which  a  certain  space  is  allotted  for  each  customer  and 
all  the  order  numbers  for  him  entered  in  this  space.  This 
facilitates  looking  up  an  order  if  the  number  is  not  known, 
as  all  the  numbers  allotted  to  a  customer  are  in  the  proper 
place  and  may  be  readily  found. 

STOCK  ROOM 

Theoretically,  at  least,  all  material  should  be  charged 
to  the  stock  room  on  arrival  and  from  this  point  be  dis- 
tributed on  requisition  as  required.  Everything  in  the 
stock  room  is  an  asset,  and  when  an  article  is  charged  out 
it  merely  passes  into  another  account,  where  it  may  still 
be  an  asset  or  an  expense. 

Those  items  which  are  charged  to  expense  accounts, 
such  as  cotton  waste,  etc.,  should  be  drawn  in  limited 
quantities  for  two  reasons.  In  order  that  one  month's 
production  shall  stand  only  its  proper  share  of  expense  as, 
if  a  large  amount  of  waste  is  drawn  for  use  in  the  machine 
shop  its  cost  is  charged  to  the  production  of  the  machine 
shop  for  the  month  in  which  it  is  drawn,  although  possibly 
a  good  share  of  it  might  be  used  in  subsequent  months. 
Where  the  supplies  of  this  nature  are  drawn  in  limited 
quantities,  the  workmen  will  be  more  careful  than  if  they 
are  allowed  to  help  themselves  at  will  from  a  full  bin. 
Material  purchased  for  office  use  should  be  treated  in  the 
same  way.  A  dozen  boxes  of  carbon  paper  may  be  pur- 
chased which  will  last  perhaps  several  months,  and  it  is, 


AND  SELLING  COSTS 


51 


of  course,  irregular  to  make  any  one  month  stand  the 
whole  expense.  It  makes  little  difference  what  the  articles 
are,  until  used  they  are  assets  and  should  be  considered 
as  such. 

Sometimes  a  separate  stock  room  is  used  for  office 
supplies  and  it  is  not  suggested  that  in  all  cases  an  order 
be  given  every  time  a  pen  or  pencil  is  required.  The  point 
is  to  charge  up  in  any  month  only  what  is  used  in  that 
month  and  this  applies  particularly  to  that  class  of  material 
entering  into  the  expense  accounts.  It  is  often  advisable 
to  purchase  in  excess  of  immediate  requirements.  This 
plan  has  advantages,  such  as  lower  prices,  fewer  invoices 
to  credit,  etc.,  and  if  the  proper  disposition  of  the  article 
is  made  on  receipt,  one  month's  selling  or  manufacturing 
expense  will  not  be  inflated  to  the  gain  of  the  succeeding 
months. 


FORM  25. 

REPORTS 

There  are  some  reports  of  so  confidential  or  private 
a  nature  that  it  is  advisable  to  keep  them  from  all  except 


52 


MANUFACTURING  COSTS 


the  one  who  makes  them  out  and  the  manager.  Where 
printed  forms  are  used  for  this  purpose  anybody  who  sees 
them  can  absorb  all  the  information  they  contain,  and 
to  avoid  this  the  following  plan  was  devised.  (See 
Form  25.) 

The   record   cards   secured   were   merely   the   ruled 
stock  cards,  and  on  one  of  these  was  written  a  kev  as 


DAILY  CASH  REPORT                     ^  <>7 

BALANCE 

£/25 

oo 

RECEIPTS 

*%  / 

3-0 

TOTAL 

6fcofc 

2,0 

DISBURSEMENTS 

33V 

00 

BALANCE 

(=^y^ 

io 

ACCOUNTING 

CASH  IN  BANK 

6000 

0  t» 

CASH  ON  HAND  BILLS 

2oo 

00 

GOLD 

0 

06 

SILVER 

72 

7o 

(,271; 

10 

BANK  DER    TODAY 

BILLS    REC.       •• 

BILLS   PAY 

FORM  FOR  DAILY  CASH  REPORT. 

shown  on  the  top  card.  The  spaces  for  the  date  and 
amounts  were  cut  away  as  shown,  and  when  it  was  neces- 
sary to  write  up  one  of  these  reports,  this  key  was  placed 


AND  SELLING  COSTS 


over  one  of  the  blank  cards  and  the  proper  figures  entered. 
After  the  key  is  removed  the  figures  are  absolutely  mean- 


0 

GOODS  RETURNED. 

SYRACUSE  WORKS. 

0 

90 

Dei 

t 

°^"««?" 

D«C.,PT,OH 

,,-c. 

IT 

•own 

Was  M.lcri 
RccM  In  <j(K 

ll 

t 

Received. 

ion           Ry 

No_ 

F-rt  .  or  H> 

p.                                                                Date  Credited 

FORM  FOR  RETURNED  GOODS. 


ingless  to  anyone  who  does  not  possess  a  key.  These 
records  may  be  used  for  sales  reports,  cash  reports,  etc., 
and  will  be  found  satisfactory. 


">4  MANUFACTURING  COSTS 

RETURNED  GOODS,  DEFECTIVE  AND 
OTHERWISE 

When  goods  are  sold  the  quantity  is  noted  on  the 
stock  book,  perpetual  inventory  or  whatever  you  choose 
to  call  it  and  is  deducted  from  the  balance  on  hand.  It 
therefore  follows  that  where  goods  are  returned  which 
are  to  ^°  placed  in  stock  again,  the  amount  received  must 
be  added  to  the  balance  on  hand. 

Since  the  credits  to  the  stock  in  process  accounts  are 
made  from  these  sheets,  it  will  be  necessary  to  handle 
the  recording  of  returned  goods  in  a  way  to  avoid  con- 
fusion. Returned  goods  must  not  be  credited  again  to 
the  stock  in  process  account  of  the  article,  yet  they  must 
be  considered  as  being  in  stock.  The  proper  entries  for 
matters  of  this  kind  are: 

Chg.        Mdse  Cost  value  of  goods 

Sales  Acct.       Difference  between  cost  and  amount 

credited. 
Credit        Customer        Amount  allowed 

and  make  the  entries  on  the  stock  book  in  red  ink.  This 
will  indicate  that  the  figures  represent  returned  goods, 
and  when  figuring  the  production  at  the  end  of  the  month 
the  necessary  deduction  may  be  made  in  order  to  find  the 
quantity  actually  manufactured. 

If  the  goods  returned  are  defective,  a  somewhat 
different  handling  of  the  matter  is  required.  Merchandise 
cannot  be  charged  since  the  goods  do  not  go  back  into 
stock,  and  sales  account  should  not  be  charged  with  any 
more  than  the  profit  originally  figured  on  the  transaction. 
If  there  is  any  salvage  the  stock  in  process  account  of  the 
article  should  be  charged  with  the  parts  saved  at  cost 
prices  and  the  balance  goes  into  profit  and  loss  account, 
although  it  may  be  advisable  in  some  cases  to  open  a 


AND  SELLING  COSTS  55 

special  account  for  matters  of  this  kind,  which  will  enable 
the  management  to  know  just  how  much  of  this  business 
is  occurring. 

Suppose  a  cast  iron  radiator  Is  returned  to  the 
manufacturer.  He  finds  on  examining  it  that  all  the 
sections  are  broken.  His  entries  would  be 

Debit.  Credit. 

Iron  Account.  For     value     of     old     Customer  for 

metal  as  scrap.  amount  allowed. 

Sales  Account.  For     profit     figured 

on  transaction. 
Profit  .and   Loss   or 

Special  Account.  For  balance. 

Instances  have  come  under  my  observation  of  foun- 
dries charging  returned  castings  to  sales  account  and  then 
wondering  at  the  close  of  the  year  why  iron  account 
showed  a  credit  and  why  sales  account  showed  much  less 
profit  than  it  should  show.  Matters  of  defects  may  be 
traced  back  to  the  workmen  in  many  instances,  yet  having 
done  this  it  is  seldom  that  he  can  be  made  to  pay  for  the 
damage  or  any  part  of  it.  If  the  transportation  company 
is  at  fault,  a  claim  may  be  entered  and  when  paid  should 
be  credited  to  the  profit  and  loss  account  if  this  account 
was  charged  when  the  goods  were  received. 

To  keep  the  records  of  a  manufacturing  concern 
correctly  requires  in  addition  to  a  technical  knowledge 
the  faculty  of  reasoning,  yet  there  will  probably  always 
be  a  class  who  will  persist  in  doing  a  thing  in  a  certain 
way  because  it  has  always  been  done  that  way  by  some- 
body else,  and  these  same  men  resent  suggestions  as  to 
improved  methods  because  they  are  afraid  that  the  person 
offering  them  has  his  eyes  on  their  job.  When  making 
suggestions  to  a  department  head  or  manager  it  is  always 
a  good  plan  to  make  them  in  writing.  Then  if  he  is  busy 
at  the  time  he  receives  them,  the  matter  can  be  laid  aside 


56 


MANUFACTURING  COSTS 


until   he   has   the    time   to   give   it   the    consideration    it 
deserves. 

PERPETUAL  INVENTORY 

One  of  the  best  things  in  an  office  system  is  the 
perpetual  inventory.  The  accompanying  form  gives  the 
essential  information  required  in  a  record  of  this  kind, 


NAME 


UNIT 


DATE 


AMTRECQ  VALUE 


BALANCE 


QUANTITY    VAUUE 


DATE 


f  SOLD 

'(OR  USED 


VALUE 


although  the  form  may  be  changed  or  combined  with 
other  records  as  in  the  stock  book,  Form  17,  from  which 
stock  manufactured  and  sold  may  be  determined. 

Whether  the  records  are  to  be  on  cards  or  loose  leaf 
books  must  be  decided  bv   each   man    for  himself,  but 


AND  SELLING  COSTS  57 

about  the  value  of  the  record  there  can  be  no  question. 
These  forms  may  be  used  for  manufactured  stock  on 
hand  and  for  material  in  the  stock  room,  although  they 
are  not  con  fined  exclusively  to  these  two  lines. 

CHANGING  OF  PRICES 

Changes  in  prices,  which  are  by  no  means  infrequent, 
require  that  this  subject  be  given  attention  by  every 
manufacturer.  For  much  of  the  material  purchased  it  is 
possible  to  make1  contracts  for  the  season's  requirements. 
This  method  merely  names  the  figure  which  has  to  be 
paid  for  that  article  during  the  life  of  the  agreement. 

No  matter  what  is  to  be  paid  for  material,  estimates 
for  future  work  should  always  be  based  on  the  market 
price  at  the  time  the  estimate  is  made.  When  figuring 
on  a  job  a  manufacturer  might  find  that  by  reason  of  his 
foresight  in  contracting  for  material  he  could  safely  figure 
below  the  market  price,  yet  it  would  not  be  policy  to  do 
this  without  an  absolute  knowledge  of  the  facts,  from 
which  he  could  determine  what  part  of  the  saving  he 
could  afford  to  give  the  customer.  Some  bidders  might 
not  have  protected  themselves  against  a  raise  in  prices 
and  of  course  they  are  at  a  disadvantage.  In  matters  of 
that  kind  a  good  plan  would  be  to  consider  all  the  facts 
bearing  on  the  subject  and  quote  according  to  the  peculiar 
circumstances  of  each  transaction. 

A  manufacturer  may  find  that  he  has  in  stock  certain 
articles  on  which  the  market  is  lower  than  when  thev 
were  purchased,  and  as  soon  as  a  fact  of  this  kind  is 
brought  to  light,  the  difference  should  be  charged  off. 
This  difference  is  a  loss  and  if  it  is  charged  immediately  to 
the  Profit  and  Loss  account  it  is  disposed  of  for  all  time, 
but  if  not,  it  will  result  in  increased  costs  on  every  article 
using  it.  The  ultimate  result  is  the  same  in  dollars  and 
cents,  and  in  some  factories  it  might  not  be  advisable  to 


58  MANUFACTURING  COSTS 

follow  this  plan  except  on  occasional  articles,  yet  at  the 
time  of  taking  inventory  nothing  should  be  valued  higher 
than  the  prevailing  market  prices. 

Dividends  declared  on  fictitious  values  have  to  come 
out  sometime  and  somewhere,  and  besides  this  the  modern 
business  man  wants  to  get  right  down  to  bed  rock  and 
wants  to  know  where  he  stands. 

CONTINUOUS  PROCESS  FACTORIES 

There  is  one  class  of  factories,  "Continuous  Process 
Factories,"  on  which  it  is  comparatively  easy  to  figure 
costs.  In  a  factory  making  paper,  for  instance,  the 
expense  is  easily  apportioned  over  the  product  and  the 
expenses  are  as  easily  determined. 

As  a  rule  these  factories  or  mills  do  not  have  the 
multiplicity  of  expense  accounts  which  a  hardware  factory 
requires,  neither  do  they  have  to  purchase  such  a  variety 
of  stock  -or  material,  and  these  two  factors  are  instru- 
mental in  enabling  their  proprietors  to  arrive  at  correct 
costs  without  an  elaborate  system  or  great  expense.  The 
factory  making  but  one  article  in  one  size  has  a  much 
simpler  proposition  than  one  making  hundreds  of  articles. 
In  the  first  case,  all  the  expense  is  borne  by  one  article, 
but  as  soon  as  another  article  is  added  a  subdivision  of 
expense  becomes  necessary  and  it  is  here  that  the  subject 
of  costs  requires  the  most  attention. 

RECEIVING  DEPARTMENT 

The  receiving  department  of  a  business  is  usually  in 
charge  of  the  shipping  department,  which  turns  the 
material  over  to  the  stock  room,  or  it  may  be  in  charge 
of  the  stock  room  direct.  In  either  case  a  record  of 
material  received  must  be  kept,  which  will  show  all  the 
necessary  information,  and  the  usual  practice  seems  to  be 


AND  SELLING  COSTS 


59 


to  ente/  the  material  received  in  a  receiving  book  and 
from  that  book  check  the  invoices. 

In  a  moderately  large  factory  this  takes  a  great  deal 
of  time.     There  is  a  great  number  of  articles  coming  in 


ReceiviNc,    RECORD 

DATE 

o 
p 

NAM  6 

WILU  SHiPuS  BY 

THE   FOLLOWING   ARTICLES 

Rece.veo                  *•«.                  PRO.NO.       CHGS. 

CAR   NO                       PLACED         STARTED    FINISHED 

COOIMTBO  o«                                                   INVOICE  SENT 
WEIGHED  BY                   CHECKED  BY    TO  OFFICE 

daily  and  the  following  plan  will  do  away  with  nearly  all 
of  the  copying  and  will,  as  a  consequence,  cut  down  the 
expense  of  operating  this  department. 

The  receiving  record  (Form  29)  is  made  when  the 
order  is  placed.  In  fact,  it  is  made  out  with  the  order 
and  is  simply  a  third  copy  of  it,  the  first  being  the  order 
which  goes  to  the  concern  from  which  the  material 


is 


<><)  MANUFACTURING  COSTS 

purchased,  the  second  being  the  record  kept  in  the  office 
and  the  third  constituting  the  receiving  record  which  goes 
to  the  receiving  department.  It  is  necessary  to  have  these 
records  of  uniform  size  and  to  have  the  arrangement  such 
that  will  insure  the  information  being  copied  in  the  correct 
spaces,  and  in  addition  the  serial  number  will  be  similar 
on  all  three  sheets.  A  binder  should  be  provided  in  which 
these  sheets  may  be  placed  where  the  material  is  received 
and  the  arrangement,  whether  by  order  number  or  by 
date  received,  may  be  determined  by  the  user.  Up  to  the 
time  the  material  is  received  these  sheets  may  be  kept  in 
a  file  arranged  alphabetically. 

The  advantages  of  this  system  are  so  evident  that  an 
extended  discussion  is  not  necessary,  and  although  it  may 
not  be  possible  to  adopt  it  in  its  entirety,  it  is  possible  to 
so  arrange  the  form  that  they  may  be  used  in  any  business. 
Of  course,  where  a  shipment  is  not  made  complete  at  one 
time,  a  record  of  what  is  not  shipped  will  have  to  be 
made,  but  the  instances  where  this  is  necessary  will  be 
rare  if  judgment  is  used  in  issuing  the  orders.  The  car 
record  book  (Form  30)  is  quite  necessary  where  the 
receipts  in  this  way  are  large,  as  it  enables  the  shipping 
clerk  or  receiving  clerk  to  keep  after  the  cartmen  and  not 
allow  demurrage  to  accumulate  unnecessarily  and  in  addi- 
tion furnishes  a  complete  record  of  all  cars  received,  date 
unloaded,  etc.,  which  are  valuable  in  checking  bills  for 
demurrage  should  there  be  any.  Invoices  may  be  secured 
in  duplicate.  The  duplicate  may  be  without  prices,  if 
desired  for  the  use  of  the  receiving  department,  which 
enables  that  department  to  check  them  up  without  know- 
ing the  prices  and  permits  a  copy  to  be  kept  in  the  office 
at  all  times.  To  be  sure,  prompt  action  is  necessary  in 
every  department  of  a  factory  if  the  costs  and  other 


AND  SELLING  COSTS  «1 

records  are  to  be  of  the  greatest  value  and  this  is  particu- 
larly true  of  the  receiving  department. 

Invoice's  for  material  received  must  be  checked  up 
and  sent  to  the  office  daily,  in  order  that  all  the  invoices 


Car  Record  Book 

Date 

Received 

Initials      dnd 
Car  NO 

Loaded  with 

Placed 

Started 

rmit»hed 

FORM  30,  FOR  CAR  RECORD  BOOK. 

for  material  received  may  be  credited  on  the  first  of  the 
month  for  the  preceding  month's  business.  This  will 
provide  for  a  correct  accounts-payable  record,  which  will 
help  in  arriving  at  a  correct  balance  sheet. 

It  may  be  urged  in  contrary  to  the  foregoing  state- 
ment that  it  makes  no  difference  whether  an  invoice  is 
credited  promptly  or  not  as  if  it  is  not  credited  it  is  not 
charged  to  the  stock  room  and  consequently  one  offsets 
the  other ;  but  material  received  the  latter  part  of  a  month 
may  be  drawn  out  immediately  and  charged  to  a  stock  in 
process  account,  in  which  case  the  stock  room  will  be 
credited  for  something  for  which  it  has  not  been  charged. 
5 


62  MANUFACTURING  COSTS 

Aside  from  this  there  is  a  correct  way  to  do  things,  which 
is  just  as  easy  as  the  incorrect,  slip-shod  method  when 
once  the  habit  of  doing  correctly  has  been  established 
and  where  things  are  done  correctly  no  allowances  need 
be  made  or  anything  taken  into  consideration  when  a 
record  is  being  looked  over.  It  will  be  correct. 

BASIS  OF  APPORTIONMENT 
No  absolute  rule  can  be  given  for  the  basis  of  appor- 
tionment. Conditions  vary  so  much  that  what  would  be 
proper  for  one  concern  would  be  entirely  wrong  for 
another.  The  more  common  methods  are  to  base  the 
apportionment  on  one  of  the  following : 

Production  Labor 

Productive  Hour 

Space  Occupied 

Material  and   Labor 

Output  of  machines  or  price  per  hour  for  use  of  machines 

.In  some  cases  two  or  more  of  these  items  are  com- 
bined. A  popular  method  is  to  figure  the  apportionment 
of  manufacturing  expense  on  the  production  labor,  since 
material  is  subject  to  no  expense  beyond  that  of  receiving, 
storing  and  disbursing  and  this  expense  may  be  charged 
as  it  leaves  the  stock  room.  To  be  sure,  a  part  of  this 
expense  belongs  to  the  stock  left  in  the  room,  but  the 
value  of  this  does  not  change  except  as  the  market  changes 
and  to  add  a  percentage  of  expense  to  this  cost  is  to 
fictitiously  increase  assets. 

All  articles  manufactured  should  be  subject  to  a 
certain  amount  of  the  general  expense;  for  instance,  of 
the  cost  of  the  rent,  heat  and  light  items,  although  they 
do  not  require  power  or  the  use  of  any  machinery  in  their 
manufacture.  Take  on  the  one  hand  a  list  of  goods  made 
by  a  factory  and  the  knowledge  of  what  expense  is 
incurred  by  them,  a  portion  of  which  they  should  stand, 
and  on  the  other  hand  a  statement  of  the  various  items 


AND  SELLING  COSTS  63 

of  expense,  and  it  will  be  found  that  there  are  some 
articles  which  should  bear  a  part  of  each  expense  item 
and  others  will  be  subject  to  expense  from  only  a  few. 
In  this  way  correct  conclusions  may  be  reached.  It  would 
not  be  correct  in  every  case  to  apportion  the  expense  in 
proportion  to  the  amount  of  direct  labor,  while  in  other 
cases  it  might  be  entirely  proper. 

Each  instance  has  its  peculiar  circumstances  which 
must  be  given  proper  consideration  in  the  distribution  of 
expense,  since  on  this  depends  correct  costs  and  on  correct 
costs  depends  in  nearly  every  case  the  success  of  the 
business.  Knowledge  is  required,  not  guess  work  or 
supposition.  There  is  not  a  producing  concern  in  exist- 
ence which  can  afford  to  neglect  this  vital  part  of  their 
business.  The  sale  of  goods  for  a  profit  is  the  aim  of  all 
and  to  grope  in  the  dark  for  want  of  proper  costs  is  sure 
to  invite  disaster.  With  the  manufacturing  cost  and  the 
selling  expense  known,  nothing  need  be  taken  for  granted. 

If  it  is  necessary  to  take  certain  orders  at  a  specified 
price  or  lose  them,  a  reference  to  the  cost  book  is  all  that 
is  necessary.  It  may  be  advisable  to  take  orders  in  some 
cases  at  a  figure  close  to  the  cost,  possibly  a  shade  under 
the  cost  in  order  to  keep  the  force  intact,  and  with  the 
cost  as  a  known  factor  the  element  of  chance  is  eliminated 
from  the  transaction.  The  correct  result  is  known  in 
advance.  Each  shipment  should  bring  an  amount  over 
the  cost  large  enough  to  be  noticed  and  if  a  large  part  of 
the  shipments  cannot  be  made  to  do  this,  it  is  better  to 
close  down  and  quit  while  it  is  possible  to  save  a  part  of 
the  investment. 

There  are  some  manufacturers  who  wish  to  know  the 
cost  but  do  not  want  their  cost  clerk  to  know  it,  so  they 
have  the  cost  clerk  turn  in  the  material  and  labor  charges 
and  add  the  manufacturing  expense  themselves.  There 
are  others  who  have  their  cost  clerks  add  so  much  ex- 


64  MANUFACTURING  COSTS 

pense  that  all  profit  is  apparently  absorbed.  These  show 
the  methods  some  men  will  take  to  keep  their  cost  men  in 
the  dark  and  these  methods  are  not  desirable  and  are  not 
generally  used. 

RUSH  ORDERS 

There  are  instances  where  certain  orders  must  be 
rushed  out  in  preference  to  others,  orders  which  are  of 
such  a  nature  that  they  admit  of  no  delay  and  to  properly 
designate  them  the  following  is  suggested : 

Have  colored  slips  on  which  are  printed  the  necessary 
instructions  pertaining  to  the  business.  These  may  be 
gummed  on  one  end  and  attached  to  the  shop  order  for 
the  material.  The  superintendent  then  knows  the  neces- 
sity of  keeping  after  that  order.  The  colored  slips 
attached  call  attention  to  the  urgency  of  the  matter  when 
an  imprint  from  a  rubber  stamp  would  probably  be  over- 
looked. Of  course,  everything  on  an  order,  or  for  that 
matter  on  any  communication,  should  be  given  proper 
attention.  In  the  press  of  other  business  some  matters 
often  quite  important  may  be  overlooked,  but  there  is  less 
chance  for  it  if  the  special  slips  are  used,  for  where 
special  attention  is  required  that  fact  is  indicated  by  the 
slip. 

There  is  one  point  not  always  considered  in  rushing 
special  orders  through  a  factory  and  that  is  the  increased 
cost.  It  is  important  in  bidding  on  work  to  give  this 
factor  proper  attention.  If  stock  orders  have  to  be  side- 
tracked in  order  to  let  a  special  job  have  the  right  of  way, 
it  is  only  proper  that  the  special  job  should  pay  for  the 
privileges  it  enjoys.  It  costs  more  to  get  that  kind  of 
work  out  and  therefore  the  job  should  bring  more.  What 
this  extra  cost  is  will  have  to  be  determined  by  the  man- 
ufacturer after  considering  all  the  facts  in  the  case,  but 
it  should  not  be  overlooked  no  matter  what  is  made. 


AND  SELLING  COSTS 


65 


Possibly  some  things  are  being  made  in  departments 
which  require  a  great  deal  of  space  and  the  department  is 
not  charged  enough  for  rent.  And  again,  perhaps  a 
certain  line  would  show  up  better  if  the  department  in 
which  it  is  made  did  not  have  to  stand  expense  for  rent 


SUMMARY. 

Munfber 
Men 

DEPARTMENT 

w^Vcl*™™'  ™« 

.Average 
per  Man  . 

Average  per- 
Day  per  Man 

Tot  aland  Average 

Pay    Roll    Week    Ending 

FORM    SHOWING  AVERAGE   AMOUNT   EARNED  BY   EACH 
EMPLOYE  IN  A  GIVEN  PERIOD  OF  TIME. 

on  space  which  it  does  not  occupy.  To  consider  theoret- 
ically each  department  of  a  factory  as  a  separate  institu- 
tion and  to  figure  as  such  what  its  share  of  the  various 
expenses  ought  to  be,  will  often  help  in  solving  the  ques- 
tion of  distribution  of  expense.  Direct  labor  and  material 
are  easy  to  handle  but  when  the  question  of  expense  is 
taken  up,  it  requires  careful  thought  in  order  to  be  sure 
that  correct  costs  are  known. 


66  MANUFACTURING  COSTS 

WATER  POWER 

Where  a  factory  runs  by  water  power  its  expense 
for  power  is  usually  much  less  than  when  steam  is  used 
and  in  cases  of  this  kind  power  account  equipment  should 
be  charged  with  the  cost  of  flumes,  turbines,  etc.,  which 
constitute  this  equipment. 

These  items  are  subject  to  a  depreciation,  the  amount 
of  which  may  be  determined  by  a  careful  estimate  of  the 
probable  length  of  time  the  apparatus  will  last.  This 
expense,  together  with  the  cost  of  labor  and  material  for 
operating,  forms  the  power  operation  account  which  is 
periodically  distributed  over  the  product  as  an  expense. 
The  bill  for  water  for  boilers  where  steam  is  used,  is  a 
charge  to  "power  account  operating,"  while  the  water  used 
for  drinking  purposes  would  be  a  charge  to  the  depart- 
ment using  it,  and  if  only  one  bill  is  furnished  by  the 
water  company  >an  estimate  may  be  made  and  a  certain 
percentage  of  the  amount  charged  may  be  charged  as 
desired. 

SINKING  FUND 

A  certain  percentage  of  the  earnings  of  a  company 
is  sometimes  set  aside  for  the  purpose  of  taking  care  of 
depreciation.  It  is  better  to  take  care  of  this  item  in 
another  way. 

Depreciation  is  always  present  and  should  be  consid- 
ered as  part  of  the  manufacturing  cost,  as  it  is  one  of  the 
expenses  incident  to  manufacturing.  Some  charge  depre- 
ciation regularly  every  month  and  at  the  end  of  the  year 
inventory  at  the  original  cost,  which  shows  up  on  the 
balance  sheet  as  a  profit.  This  makes  a  nice  looking 
statement  to  send  to  a  bank,  but  by  no  means  represents 
the  actual  state  of  affairs,  as  instances  where  a  factory 
increases  in  value  from  year  to  year  with  no  added 
buildings  or  equipment  are  very  rare. 


AND  SELLING  COSTS  67 

ADMINISTRATION  EXPENSE 

The  salaries  of  the  officers  of  a  concern  are  properly 
chargeable  to  whatever  part  of  the  business  they  devote 
their  time.  If  the  president  gives  his  time  to  all  the  more 
important  matters  of  each  department,  his  salary  should 
be  distributed  in  a  way  which  will  result  in  each  depart- 
ment being  charged  with  its  proper  share. 

In  one  factory  with  which  I  am  familiar  the  president 
devotes  his  entire  time  to  the  manufacturing  end  of  the 
business,  the  vice-president  and  treasurer  take  care  of  the 
sales  and  financial  matters,  while  the  secretary  looks  after 
the  accounting  including  the  cost  department.  The  salary 
of  the  president  is  charged  to  manufacturing  expense,  the 
salary  of  the  vice-president  and  treasurer  is  charged  half 
to  selling  expense  and  half  to  office  expense  and  the  secre- 
tary's salary  is  charged,  one-quarter  of  which  goes  to  man- 
ufacturing expense  and  three-quarters  to  selling  expense, 
A  little  thought  will  show  what  disposition  is  proper  and 
the  proper  preparation  once  arrived  at  will  require  no 
further  attention,  being  taken  care  of  by  the  bookkeepers, 
unless  changes  in  administration  cause  a  new  apportion- 
ment. 

RENT 

Where  the  factory  space  is  leased  there  is  usually 
little  expense  chargeable  to  rent  account  beyond  occasion- 
ally putting  in  a  light  of  glass  or  some  other  small  item 
of  this  character  and  since  each  department  requires  space, 
it  is  proper  to  charge  each  department  with  the  proper 
proportion  of  that  expense. 

The  office  is  no  exception  to  the  rule  and  it  would 
seem  that  this  arrangement  would  be  a  proper  one  for 
some  factories,  even  though  the  buildings  are  owned  by 
the  concern.  The  item  of  rent  is  no  less  evident  even  if 


68  MANUFACTURING  COSTS 

carried  under  another  name.  Repairs  to  buildings,  depre- 
ciation, yard  help,  carpenter  work,  etc.,  all  enter  into  it 
and  there  can  be  no  serious  objection  to  charging  each 
department  with  its  proper  share,  instead  of  apportioning 
its  cost  over  the  whole  production. 


DEPRECIATION 

Except  in  rare  instances  equipment  becomes  less 
valuable  from  year  to  year,  notwithstanding  the  fact  that 
necessary  repairs  have  been  charged  to  expense  accounts. 
This  brings  up  the  question  of  depreciation  which,  briefly 
stated,  should  be  a  certain  percentage  of  the  value  of 
buildings,  machinery,  etc.,  charged  to  depreciation  and 
from  this  account  is  charged  to  various  expense  accounts. 

A  certain  machine  will  last,  say  ten  years.  It  is 
evident,  therefore,  that  to  allow  for  the  proper  amount  of 
depreciation,  10%  of  its  cost  must  be  charged  off  each 
year  so  that  the  cost  of  the  machine  is  borne  by  the 
production  each  year.  In  matters  of  this  kind  it  is  well 
to  remember  that  if  10%  of  the  cost  is  charged  off  the 
first  year  there  is  left,  at  the  beginning  of  the  second  year, 
only  90%  of  the  original  cost,  at  which  the  machine  should 
be  inventoried,  and  in  figuring  further  depreciation  10% 
per  year  of  the  original  cost,  not  balance,  should  be  taken, 
for  if  10%  of  the  balance  is  used  the  entire  cost  will  never 
be  charged  off.  In  fact,  there  will  be  on  the  books  at  the 
end  of  ten  years  over  35%  of  the  original  cost  which 
should  have  been  charged  off  long  ago. 

One  way  to  handle  matters  of  this  kind  is  to  charge 
off  the  correct  amount  at  the  end  of  the  year,  charging 
it  with  profit  and  loss  and  inventorying  at  the  proper 
figures  to  allow  for  this,  a  permissable  way  for  concerns 
satisfied  to  know  at  the  end  of  a  year  whether  they  have 
lost  money  or  made  money.  But  the  manufacturer  who 


AND  SELLING  COSTS  69 

is  up-to-date  will  consider  this  item,  monthly  and  will 
know  every  month  'how  he  stands. 

Repairs  to  buildings,  machinery,  etc.,  are  an  expense 
as  a  general  thing  in  addition  to  the  depreciation  figured. 
Thus,  if  a  new  belt  is  purchased  it  is  charged  to  some 
expense  account  unless  it  is  for  new  equipment,  in  which 
case  it  should  be  charged  to  belting  account.  In  other 
words,  additions  to  the  plant  are  assets,  repairs  and 
replacements  are  expense  items,  and  to  be  sure  that  the 
assets  are  actual  and  that  they  will  inventory  properly, 
it  is  necessary  to  charge  depreciation  in  addition  to  main- 
taining so  far  as  possible  by  repairs  and  replacements  the 
actual  value.  In  some  instances  the  depreciation  will  be 
a  small  item  of  course,  but  the  factory  and  equipment 
which  is  worth  as  much  ten  years  from  the  date  bought 
as  when  purchased,  is  hard  to  find.  Some  factories  are 
purchased  at  sheriff's  sale  at  a  small  percentage  of  their 
real  worth.  It  is  not  necessary  to  figure  depreciation  on 
them  if  they  are  entered  on  the  books  at  purchase  prices. 
It  is  usual,  however,  to  make  entries  which  will  show 
purchases  of  this  kind  at  actual  value. 

As  has  been  stated  before,  circumstances  govern  all 
these  matters  and  it  is  not  the  intent  of  the  author  to  lay 
down  any  set  rules  in  matters  of  this  kind,  but  rather  to 
express  his  views  on  the  popular  methods.  Even  real 
estate  is  not  always  exempt  from  depreciation.  Values 
decline  and  it  is  true  that  they  sometimes  take  the  upward 
tendency.  In  either  case  a  revaluation  is  entirely  proper. 

FREIGHT  AND  DEMURRAGE 

Freight  on  material  purchased  is  a  part  of  the  cost 
of  the  goods  and  should  be  so  considered.  Coal  might 
cost,  for  instance,  $1.50  per  ton  at  the  mines  and  have  a 


70  .MANUFACTURING  COSTS 

freight  rate  of  $2.19  per  ton.  It  is  evident,  therefore,  that 
this  material  costs  $3.60  per  ton. 

Nobody  would  think  of  handling  a  matter  of  this 
kind  differently,  yet  small  items  of  freight  are  frequently 
handled  in  a  separate  account  which  is,  of  course, 
incorrect  unless  from  that  account  proper  distribution  is 
made.  Demurrage  charges  are  properly  a  charge  against 
cartage  and  not  against  the  contents  of  the  car  or  boat. 
If  given  his  own  way,  the  head  cartman  might  arrange 
his  work  so  that  there  would  be  no  demurrage  charges, 
but  it  sometimes  happens  that  the  contents  of  a  particular 
car  is  needed  immediately  and  all  teams  are  set  to  work 
unloading  and  by  reason  of  that  demurrage  accumulates 
on  the  cars  placed  prior  to  that  time.  If  outside  help  is 
secured  for  carting,  the  expense  would  be  charged  to 
cartage  account,  so  that  it  is  perfectly  proper  to  charge 
demurrage  which  accrues,  to  the  same  account. 

Demurrage  is  not  always  an  item  of  unnecessary 
expense,  for  it  will  frequently  be  found  cheaper  to  pay 
a  few  dollars  demurrage  charges  than  to  employ  extra 
cartmen.  Freight  allowed  on  goods  sold  may  be  deducted 
from  the  invoice  or  credited  on  receipt  of  the  paid  freight 
bill.  The  former  is  much  the  better  plan  although  not 
the  more  common  one.  These  items  are  charged  to  sales 
account  and  the  vouchers  must  be  returned  promptly  for 
credit  if  the  accounts  receivable  of  the  shipper  are  to 
be  kept  correctly.  To  allow  customers  to  return  freight 
bills  for  credit  once  or  twice  a  year  will  result  in  many 
cases  of  dividends  being  declared  unintentionally  perhaps 
on  imaginary  profits.  The  customer  can  be  educated  on 
this  point  as  well  as  on  any  other,  if  the  matter  is  gone 
about  in  the  right  way. 

For  those  who  wish  to  keep  their  accounts  receivable 
in  the  proper  way,  yet  do  not  wish  to  credit  freight  on 
invoices  the  following  is  suggested.  Figure  the  freight 


AND  SELLING  COSTS  71 

on  each  shipment  on  which  it  is  allowed  and  at  the  end  of 
the  month  charge  sales  account  and  credit  special  freight 
account  for  the  total.  Then,  when  freight  bills  are 
received  for  credit,  credit  the  customer  and  charge  special 
freight  account.  The  balance  of  special  freight  account 
should  be  deducted  from  the  accounts  receivable  to  find 
what  the  balance  of  this  account  really  is,  and  after  a 
time  a  portion  of  it  may  possibly  be  credited  to  profit  and 
loss  account,  as  some  bills  may  never  be  returned  for 
credit. 

DISCOUNT 

When  a  bill  is  paid  and  a  discount  deducted  for 
payment  within  a  certain  specified  time  it  is  customary  to 
credit  discount  for  the  amount  so  saved. 

It  is  true  that  the  goods  cost  just  that  much  less  than 
the  invoice  price  and  some  may  consider  it  proper  to 
handle  these  matters  in  such  a  way  that  the  books  will 
show  that.  The  general  plan,  however,  seems  to  be  to 
credit  this  saving  to  the  discount  account.  No  appre- 
ciable difference  in  the  costs  will  be  noticed,  however,  as 
the  average  rate  of  discount  allowed  is  less  than  2%. 
Discount  allowed  for  prepayment  of  invoices  of  goods 
sold  is  charged  to  sales  account,  in  effect  at  least,  although 
discount  is  charged  with  this  account  by  some.  In 
making  the  prices  we  virtually  name  two  prices  and  the 
customer  chooses  which  he  will  take. 

ROYALTIES  AND  PATENTS 
Certain  articles  may  be  manufactured  on  a  royalty 
basis,  that  is  a  certain  amount  per  unit  may  be  paid  to  the 
owner  of  the  patent  for  the  privilege  of  using  it.  In  such 
cases  this  amount  must  be  charged  to  the  cost  of  -the 
goods.  This  is  easy  as  it  is  a  known/  quantity. 

Where  the  patent  on  an  article  or  process  is  acquired, 
the  method  of  handling  it  must  be  different. 


72 


MANUFACTURING  COSTS 


ANALYSIS  OF  EXPENSE 

MONTH                            Y^AR 

ire  AI 

AMOI//VT 

DtST  F\  1  &  U  T/ON 

M  F6. 

S£L.l~IWG 

OFFICE  EXPENSE 

^ 

<?<> 

HEATPOWtKtUGHT 

DEPRECIATION 

ADVERTISING 

POSTAGE 

TELEPHONE 

INSURANCE 

SUPTC,  FOREMEN 

STATIONERY 

CARTAGE 

, 

TOTALS 

DIRECT  LABOR 

^ 

SALES 

% 

FORM  32. 


AND  SELLING  COSTS  73 

The  life  of  a  patent  in  the  United  States  is  seventeen 
years  and  no  renewal  is  permitted.  It  is  evident  that  the 
cost  of  the  patent  must  be  distributed  over  the  material 
manufactured  during  this  time.  It  must  also  be  consid- 
ered that  a  new  patent  may  make  practically  worthless 
the  one  you  hold  and  may  make  it  unprofitable  to  con- 
tinue to  manufacture  a  certain  line,  which  suggests  that 
it  is  wise  to  get  rid  of  the  cost  of  a  patent,  as  a  rule, 
during  the  first  half  of  its  life. 

It  is  a  common  practice  to  charge  patents  to  a  patent 
account  and  to  consider  them  as  assets.  That  is  well 
enough  providing  that  a  certain  amount  is  charged  ofT 
periodically.  Otherwise  the  value  is  inflated. 

It  should  be  remembered  that  the  ratings  given  in 
the  commercial  reports  are  not  always  correct.  The 
balance  sheet  of  the  concern  giving  them  is  used  as  a  basis 
in  compiling  them  and  balance  sheets  sent  to  the  bank 
are  often  miskading  as  to  the  true  state  of  affairs  and 
many  times  unintentionally  so.  Otherwise  why  the  failure 
of  so  many  manufacturers?  It  sifts  down  to  the  subject 
of  cost  and  this  includes  not  only  the  cost  of  manufac- 
turing, but  the  cost  of  selling  and  if  properly  handled 
provides  for  a  balance  sheet  from  which  all  estimating 
has  been  eliminated.  In  other  words,  a  balance  sheet  can 
be  made  to  show  the  actual  state  of  affairs. 

BURDEN 

The  name  burden  is  applied  by  some  writers  on  the 
subject  of  costs  to  that  portion  of  a  cost  which  is  treated 
herein  as  indirect  expense,  such  as  rent,  heat,  light, 
power,  depreciation,  etc.  It  matters  little  what  it  is 
called  so  long  as  it  is  recognized  and  treated  in  the  proper 
way. 

The  manufacturer  who  finds  that  100%  added  to  his 
direct  labor  represents  the  average  amount  he  must  use 


74 


MANUFACTURING  COSTS 


as  overhead  expense  or  burden,  should  endeavor  to  see 
that  the  items  of  expense  do  not  exceed  this  figure  and 


w 


3    ° 
H   s-1 


tn      !> 
O     O 

^H          W 


H- 1          Ci 

O     < 

z 


comparative  statements  showing  both  by  value  and  per- 
centage of  each  expense  item  will  enable  him  to  keep 
account  of  this  subject.  In  making  an  estimate  he  can 


AND  SELLING  COSTS  75 

add  one-hundred  per  cent  to  the  estimated  labor  cost  and 
will  thus  arrive  at  a  pretty  accurate  figure,  safe  enough 
to  take  business  on.  The  cost  of  estimating  is  a  man- 
ufacturing expense  in  some  cases  and  in  others  a  selling 
expense.  To  illustrate  :  A  factory  making  a  line  of  shelf 
hardware  to  carry  in  stock  would  charge  the  expense  of 
estimating  its  cost  to  manufacturing  expense,  while  a 
foundry  making  castings  only  on  orders  and  estimating 
on  the  requirements  of  a  customer,  would  consider  the 
estimating  charge  as  a  selling  expense. 

HEAT,  LIGHT  AND  POWER 

These  subjects  are  usually  considered  in  the  same 
account  since  the  source  of  production  is  usually  the 
same.  Power  is  a  general  expense.  All  departments  of 
a  factory  use  it  to  some  extent  at  least  and  also  require 
heat  and  light.  A  subdivision  of  this  account  or  the 
expense  part  of  it  may  be  as  follows : 

Power  account — Labor 
Power  account — Material 
Power  account — Repairs 

The  item  of  labor  is  made  up  of  whatT  is  paid  the 
engineers  and  firemen. 

Material  includes  coal  or  whatever  else  is  used  for 
fuel,  including  in  some  places  scrap  pieces  of  wood  and 
s'havings  from  the  wood  shop,  which  is  credited  to  the 
department  delivering  it. 

Repairs  will  be  charged  with  whatever  expenditures 
of  labor  and  material  are  necessary  to  keep  the  plant  in 
running  order  and  to  maintain  so  far  as  possible  its 
insurable  value.  New  boiler  tubes  and  the  labor  of 
putting  them  in  would  be  an  illustration  of  what  is  meant 
by  this  item.  The  power  account  will  thus  be  kept  in  a 
way  which  will  admit  of  a  statement  being  made  monthly, 


76  MANUFACTURING  COSTS 

which  will  show  the  cost  of  the  various  items  constituting 
this  account.  Comparative  statements  of  this  kind  are  of 
great  value.  Coal  purchased  for  use  under  the  boilers 
would  naturally  be  charged  to  power  account  material, 
yet  it  is  not  proper  to  do  this  unless  all  the  coal  charged 
during  a  month  is  used  in  that  month.  Where  apportion- 
ments of  expense  are  made  monthly,  it  would  be  a  much 
better  plan  to  charge  the  coal  to  coal  or  fuel  account  and 
as  it  is  used  credit  this  account  and  charge  power  account 
material. 

Of  course  it  makes  no  difference  in  the  long  run,  but 
it  does  not  give  correct  costs  to  treat  matters  of  this  kind 
carelessly.  It  might  result  in  the  wiping  out  of  all  profits 
for  the  month,  if  the  inventory  were  not  taken  into  con- 
sideration and  besides,  what  is  the  use  of  having  approx- 
imate costs  when  actual  costs  are  so  easily  found? 

In  a  certain  factory  the  various  departments  were  as 
follows:  W'oodshop,  machine  shop,  foundry  and  pattern 
department  and  in  addition  space  in  one  of  the  buildings 
was  rented  to  a  concern  making  bicycles.  In  order  to 
determine  what  pro'portion  of  expense  for  power  was 
properly  chargeable  to  each  department,  an  engineer  was 
called  in  who  went  about  it  in  the  following  way : 

He  found  the  actual  horse-power  used  when  each 
department  was  running  in  the  usual  way.  He  then  had 
every  machine  in  the  factory  thrown  off  so  that  only  the 
line  and  center-shafts  were  in  use.  At  different  times  he 
had  each  of  the  various  departments  run  all  their 
machinery  as  usual,  while  all  the  other  rooms  had  no 
machinery  running.  This  was  done  by  a  system  of  signals 
from  the  engine  room,  the  whistle  being  blown  as  per  a 
program  of  which  each  foreman  had  a  copy.  When  this 
test  was  finished,  it  was  easily  determined  just  how  much 
of  the  expense  for  power  was  chargeable  to  each  of  the 
departments,  something  they  had  been  guessing  at,  and  it 


AND  SELLING  COSTS 


77 


was  also  found  that  by  trueing  up  the  line  shafting  a 
considerable  amount  of  power  was  saved,  enough  so  that 
the  saving  in  that  alone  paid  for  the  test  in  less  than  a 


Reports  of  Accounts   Unpaid  at   the  beginning  of   the  month  and 
Cash  Collections  and  Bank  Deposits  during  the  month. 

Office                      Month  of                         190 

190         Accounts  Unpaid                   

1 
2 
3 
4 
5 
6 
7 
8 
9 
10 
11 
12 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
Totals 

Cash 
Collections 

Bank 
Deposits 

Remarks 

DAILY  COLLECTIONS  FORM — 34. 


78  MANUFACTURING  COSTS 

month.  Tests  of  this  kind  do  not  have  to  be  made  often, 
but  are  of  immense  value  to  some  establishments.  Where 
electricity  is  used  a  test  of  this  character  is  not  needed, 
since  the  power  company  can  furnish  the  required  infor- 
mation and  it  might  be  remarked  that  the  saving  in  elec- 
tricity is  considerable,  since  the  line  shafts  are  eliminated 
to  a  great  extent. 

In  apportioning  the  expense  for  power  the  office 
should  not  be  overlooked,  since  it  requires  light  and  heat. 
In  some  cases  a  flat  amount  is  charged  to  the  office  for 
rent,  which  includes  these  items  and  the  amount  credited 
to  general  expense,  which  simplifies  matters  to  quite  an 
extent. 

CARTAGE  ACCOUNT 

This  account  is  usually  charged  with  the  expenses  of 
operating  the  department  maintaining  the  equipment, 
salaries  paid,  expenses  of  repairing  harness,  etc.,  are  all 
a  part  of  this  account.  To  determine  how  the  amounts 
charged  to  this  account  shall  be  apportioned  requires  a 
careful  study  of  conditions.  Part  of  the  work  done  by 
this  department  is  the  drawing  in  of  material  to  be  man- 
ufactured, part  is  in  taking  finished  goods  to  the  railroad 
station  or  to  customers. 

It  can  easily  be  found  what  proportion  of  the  expense 
incurred  should  be  borne  by  the  several  departments 
served  and  the  charges  can  be  based  on  these  figures. 
Thus  a  certain  percentage  might  be  charged  to  factory 
manufacturing  expense,  part  to  wood  shop  expense  and 
part  to  power  account  and  the  proper  proportion  once 
arrived  at  will  require  no  changing,  as  a  rule,  for  a  long 
time.  As  assets,  this  account  will  have  the  value  of  the 
equipment,  which  should  be  subject  to  a  change  for  depre- 
ciation. The  account  may  be  divided  into  two  parts,  one 
of  which  represents  the  equipment  or  assets  and  the  other 


AND  SELLING  COSTS  79 

the  charges  for  maintenance,  which  are  of  course  expense 
items  and  should  be  charged  to  other  expense  accounts 
periodically. 

MECHANICAL  APPLIANCES 

Machinery  has  much  to  do  with  the  reducing  of  costs 
in  the  factory  and  in  the  modern  offices  are  found  many 
machines  which  give  absolutely  accurate  results  at  a  large 
saving  of  time.  Time  recorders,  typewriters,  numbering 
and  computing  machines  are  made  in  such  variety  that 
all  business  requirements  can  be  met. 

It  is  unnecessary  to  dwell  on  the  fact  that  the  concern 
using  these  modern  up-to-date  appliances  has  a  great 
advantage  over  those  who  still  stick  to  old  fashioned 
ideas  and  methods.  Nor  is  it  advisable  to  mention  in  this 
treatise  the  manufacturers  of  these  devices,  since  the 
reader  can  get  all  the  information  necessary  by  writing 
to  the  advertisers  in  the  technical  and  business  magazines. 

INSPECTION 

The  cost  of  inspecting  an  article  is  part  of  the  cost 
of  that  article,  yet  it  is  not  always  advisable  to  treat  the 
matter  in  just  this  way.  The  cost  of  inspection  therefore 
is  sometimes  made  an  expense  item  against  the  whole 
department  and  reaches  the  articles  inspected  through  the 
manufacturing  expense. 

If  each  article  produced  in  a  department  were  subject 
to  inspection  charges,  possibly  there  would  be  no  great 
difference  whichever  method  were  used,  but  the  fact 
remains  that  there  are  usually  some  articles  which  do  not 
require  inspection  and  this  leads  to  the  conclusion  that  the 
former  plan  is  the  more  desirable. 

The  cost  of  boxing  an  article  may  be  made  to  include 
the  final  inspection  in  many  cases  and  it  is  desirable  to  do 
this  where  possible.  Where  more  than  one  employe  is 


80  MANUFACTURING  COSTS 

engaged  in  this  work  tickets  may  be  furnished  giving  a 
letter  or  number  and  one  of  these  packed  in  each  box. 
This  serves  to  identify  the  packer  should  a  complaint 
against  the  packing  be  received.  The  item  of  boxing  is  a 
part  of  the  cost  of  an  article,  as  is  also  the  cost  of  the 
box,  label  and  direction  sheet  if  one  is  used.  These  are 
considered  in  the  estimate  when  one  is  made  and  may  be 
deducted  from  the  cost  when  quoting  on  material  to  be 
furnished  in  bulk. 

It  often  happens  that  concerns  purchase  in  the  open 
market  some  finished  part  which  they  have  not  considered 
it  advisable  to  make  for  themselves.  In  order  to  know 
that  they  are  saving  money  by  this  method,  it  is  advisable 
to  make  an  estimate  on  the  part  to  see  what  the  cost 
should  be.  The  outlay  for  special  machinery,  tools,  etc., 
should  be  considered  in  order  that  an  intelligent 
comparison  may  be  made. 

In  changing  from  buyer  to  manufacturer  it  is  well 
to  proceed  slowly,  for  there  are  some  manufacturers  who, 
by  specializing  their  product,  making  only  one  line  of 
goods,  are  able  to  produce  them  at  a  minimum  figure. 
The  utilization  of  scrap  often  plays  an  important  part  in 
reducing  cost.  Brass  parts  of  machines  may  often  be 
made  for  less  than  steel  parts,  for  the  reason  that  the 
scrap  has  a  much  greater  value  than  steel  scrap  and  owing 
to  its  softness  brass  may  be  worked  on  faster.  Often  it 
is  possible  to  more  than  triple  the  output.  And  again,  the 
saving  in  selling  the  scrap  where  possible  has  its  saving 
effect.  Even  scrap  tin,  which  is  usually  thrown  on  the 
dump,  is  worth  many  dollars  per  ton  and  the  skimmings 
from  a  brass  furnace  are  saleable  at  several  dollars  per 
barrel.  A  large  saving  is  possible  in  many  of  the  large 
factories  and  practically  all  of  the  small  ones  in  this 
saving  of  waste  material  alone,  enough  in  many  instances 
to  enable  them  to  declare  a  larger  dividend  than  before 


AND  SELLING  COSTS 


81 


COST   OF  JOB 


F    1163 


NAME 


&  • 


0   /  0  ? 


31 


'0 


Expense 


53 


Sundry  Charges 


Cost 


0? 


Amouirt  Rec'J 


?/ 


AMOUNT  CH'C'D 


5^o 


3 


/i'oo 


00 


Cj  00 


SIMPLE  COST  SHEET  FOR  JOBBING  FOUNDRY. 


82  MANUFACTURING  COSTS 

and  possibly  to  enter  into  the  manufacture  of  articles  on 
which  the  apparent  profit  has  seemed  too  small. 

INSURANCE 

Insurance  is  an  expense  which  should  be  apportioned 
to  the  various  departments  in  a  way  which  will  insure 
each  department  getting  its  rightful  share.  The  charges 
for  the  year  must  be  divided  into  twelve  parts  and  one 
part  charged  each  month,  so  that  each  month's  production 
stands  the  proper  amount,  for  the  production  has  to  stand 
this  expense  eventually.  Liability  insurance,  plate  glass 
and  fly-wheel  insurance  are  all  treated  in  the  same  way, 
as  is  also  the  subject  of  taxes. 

LOOSE-LEAF  BOOKS  AND  CARD  SYSTEMS 

A  great  deal  of  thought  has  been  given  to  the  subject 
of  loose  leaf  and  card  systems  of  accounting  and  in  most 
factories  their  use  is  an  advantage.  A  combination  of 
cards,  loose  leaf  books  and  bound  books  is  usually  best, 
as  there  are  some  places  where  each  may  be  used  to  good 
advantage. 

There  are  some  who  yet  use  the  old  bound  books 
exclusively  and  there  are  others  who  have  gone  cards- 
and-loose-leaf  crazy.  Neither  is  getting  the  best  system, 
for  there  are  places  where  cards  and  cards  alone  give 
the  best  results,  and  the  same  can  be  said  of  loose-leaf 
systems  and  bound  books  and  it  is  well  for  the  manufac- 
turer to  remember  that  a  fad  or  mania  in  this  connection 
will  often  defeat  the  desired  results.  The  ideal  system  is 
that  which  gives  the  best  results  with  the  fewest  number 
of  forms  for  the  work  in  hand. 

ARRANGEMENT  OF  FACTORY 
The  arrangement  of  departments  has  much  to  do 
with  costs.    A  factory  which  is  so  arranged  that  material 


AXD  SELLING  COSTS  83 

starts  in  at  one  end  of  the  plant  an:l  goes  directly  through, 
coming  out  as  finished  product  at  the  other  end,  is  pretty 
well  equipped.  It  is  the  continual  carting  of  partly  fin- 
ished material  back  and  forth  that  increases  cost  with 
nothing  to  show  for  it.  Of  course,  this  ideal  arrangement 
can  never  he  maintained  absolutely,  for  as  a  plant  grows 
the  additions  can  not  always  be  made  to  conform  to  this 
idea.  The  thing  to  avoid  is  unnecessary  trucking.  Keep 
the  material  where  it  is  easy  to  reach  and  arrange  so  far 
as  possible  to  send  work  from  one  department  to  another 
quickly,  and  avoid  such  things  as  having  the  woodshop 
the  length  of  the  plant  from  the  lumber  piles. 

PURCHASING 

The  purchasing  department  plays  an  important  part 
in  costs.  The  material  must  be  selected  not  only  on 
account  of  price,  but  quality  as  well.  There  is  a  factor 
which  must  be  reckoned  with  in  some  cases,  dishonest 
foremen,  and  this  matter  shall  now  receive  our  attention. 

While  talking  with  a  salesman  for  a  varnish  house 
a  short  time  ago,  I  mentioned  our  neighbors  across  the 
street  and  said:  "They  use  large  quantities  of  varnish. 
Do  you  sell  them?"  and  his  answer,  "No,  they  have  a 
crooked  finisher,"  surprised  me.  To  overcome  similar 
conditions  the  following  plan  is  submitted  in  the  hope 
that  it  may  be  of  benefit  to  manufacturers  and  purchasing 
agents  in  placing  contracts,  even  if  the  article  in  question 
is  not  varnish. 

Get  your  samples  together,  the  same  quantity  from 
each  bidder  for  the  contract  and  transfer  these  to  new 
tin  cans  on  which  has  been  pasted  a  label  bearing  a 
number  only.  Send  the  whole  outfit  to  the  finishing 
department  and  have  a  test  made.  The  finisher  cannot 
tell  without  the  label  whose  goods  he  is  testing.  He 
must  make  the  report  then  on  merit  and  if  it  shows  that 


84  MANUFACTURING  COSTS 

the  kind  you  have  always  used  is  the  best,  keep  on  using 
it.  I  do  not  mean  to  suggest  that  any  great  proportion  of 
finishers  is  dishonest.  Rather  I  would  say  that  they  are 
all  honest  and  then  proceed  to  prove  that  by  a  test  as  I 
have  suggested. 

The  purchasing  agent  should  do  the  buying.  It  is 
not  a  profitable  thing  for  a  factory  to  have  its  foremen 
do  that  work  and  the  firm  which  permits  salesmen  to 
interview  employes  outside  the  purchasing  department  is 
taking  long  chances.  I  have  known  representatives  from 
oil  houses  who  never  asked  for  the  purchasing  agent.  They 
wanted  to  see  the  engineer  and  through  him  work  back 
to  the  ''Purchasing  Department,"  with  a  requisition 
tion  for  an  order.  The  salesman  of  the  future  is  going  to 
be  a  salesman,  not  merely  a  traveling  man  and  will  be 
straightforward  and  honest  in  his  methods,  as  indeed  most 
of  them  are  now.  Permanent  service  is  never  built  on 
anything  less  than  16  oz.  to  a  Ib.  and  100  c.  to  a  dollar. 
If  it  is  necessary  for  a  salesman  to  interview  a  foreman, 
I  believe  it  is  a  good  plan  for  the  interview  to  take  place 
at  the  purchasing  agent's  desk  and  samples  to  be  tried 
should  be  distributed  from  this  same  department  after 
making  provision  for  a  report  on  them.  Finally,  I  believe 
that  a  purchasing  agent  does  himself  an  injustice  if  he 
does  not  see  every  salesman  who  attempts  to  call  on  him. 
Many  of  his  callers  will,  it  is  true,  fail  to  interest  him, 
but  it  is  necessary  to  see  them  all  in  order  to  find  the  one 
who  will  do  best  by  you. 

CLAIMS  AND  HOW  TO  HANDLE  THEM 

In  this  article  no  special  forms  are  shown,  as  but  few 
are  required  and  they  are  so  simple  as  to  be  readily  under- 


AND  SELLING  COSTS  cS5 

stood    from   the   descriptions.  The   question   of    claims 

naturally  divides  itself  into  two  classes : 

1.  The   claims   made   on  an   establishment   by    its 
customers  and 

2.  The    claims    made    by    a    concern    against    the 
transportation    companies    and  the    people    from    whom 
they  purchase. 

Some  houses  make  a  practice  of  paying  every  bill 
sent  them  by  a  transportation  company  and  if  there  is  an 
overcharge  they  enter  a  claim  for  it  later.  To  me  this 
seems  a  reckless  way  of  doing  business  to  say  the  least. 
If  a  bill  is  rendered  for  car  service,  for  instance,  it  should 
be  checked  up  by  the  shipping  clerk  from  his  car  book, 
which  is  a  record  easily  kept  and  if  correct,  it  may  be 
paid.  If  it  is  incorrect,  don't  pay  it.  Make  them  submit 
a  bill  which  is  correct.  If  this  plan  is  followed,  it  means 
one  less  claim  to  enter  in  case  an  error  is  discovered  in 
the  bills,  a  dozen  or  so  fewer  letters  to  write,  to  say 
nothing  of  loaning  the  amount  of  the  overcharge  to  the 
transportation  company  for  a  few  months  without  interest. 

When  freight  bills  come  in  they  should  be  examined 
the  same  as  invoices,  the  rate  checked  by  the  traffic  man- 
ager and  if  correct  in  every  way  should  be  O.  K.'d  and 
paid.  But  if  it  is  paid  on  presentation  (a  common  prac- 
tice) and  errors  are  discovered  later,  it  becomes  a  case  of 
getting  down  on  your  knees  and  humbly  asking  for  the 
return  of  your  own  money.  The  claim  clerk,  traffic  man- 
ager or  whatever  he  may  be  called,  can  be  as  useful  in 
keeping  down  the  number  of  claims  as  he  is  in  properly 
following  up  those  which  it  has  been  necessary  to  make. 
The  time  extended  by  the  local  freight  agents  in  which 
bills  may  be  paid  is,  of  course,  a  courtesy  on  his  part  and 
is  of  just  as  much  value  to  the  transportation  company 
as  to  the  consignee,  as  where  the  practice  is  to  pay 
monthly  or  semi-monthly,  clerical  work  is  reduced  in 


80  MANUFACTURING  COSTS 

both  offices.  This  must  answer  the  argument  often  put 
forth,  that  if  you  don't  pay  the  bills  as  rendered  you  will 
have  to  pay  on  delivery  of  freight  which,  of  course,  would 
make  an  immense  amount  of  extra  work. 

To  sum  up  the  claims  against  transportation  com- 
panies:  They  should  consist  of  claims  for  goods  lost  or 
damaged  in  transit  and  possibly  for  overcharges  on  the 
freight  bills  sent  in  by  customers  for  credit.  In  entering 
a  claim  a  letter  should  be  written  giving  all  the  essential 
information  and  to  this  should  be  attached  the  original 
bill  of  lading.  This  letter  is  mailed  to  the  transportation 
company  and  a  copy  kept  for  the  office  files.  All  claims 
should  be  numbered  and  a  quantity  of  letter  heads  with 
blank  spaces  for  the  numbers  will  be  found  very  conveni- 
ent and  in  addition  a  request  may  be  printed  asking  that 
your  claim  number  be  referred  to  in  all  correspondence 
relating  to  the  matter.  A  charge  is  made  whenever  a 
claim  is  made  against  a  transportation  company  and  the 
number  of  the  claim  should  be  posted  in  the  ledger.  When 
a  remittance  is  received  paying  a  claim,  the  number  of 
the  claim  it  pays  should  be  placed  on  the  cash  book  in 
order  that  the  book-keeper  may  post  it  and  then  check 
both  the  charge  and  the  payment.  The  unchecked  items 
will  then  represent  unpaid  claims  and  when  the  auditor 
makes  an  examination  of  the  books  he  can  see  the  situation 
at  a  glance  and  if  necessary  can  ask  for  the  correspond- 
ence, especially  if  he  has  reason  to  think  that  the  matter 
has  been  unduly  delayed. 

If  the  man  who  enters  the  claims  and  follows  them 
up,  has  charge  of  the  routing  and  interviews  with 
the  representatives  of  the  railroad  companies,  it  will  be 
found  that  the  claims  will  receive  better  attention  than 
if  these  matters  are  handled  by  separate  departments. 
The  rule,  no  just  claim  need  ever  be  withdrawn,  is  a 


AND  SELLING  COSTS  87 

good  motto  for  the  traffic  manager  to  have  on  his  desk. 
The  ledger  accounts  of  the  various  companies  against 
whom  claims  are  entered  thus  serve  as  a  check  on  the 
claim  department  and  no  claim  can  be  cancelled  once  it 
is  entered,  unless  a  credit  is  put  through,  and  in  the 
matter  of  authorizing  credits  there  is  not  much  laxity  in 
any  of  the  business  houses  of  today. 

In  filing  claims  a  vertical  file  will  be  found  very 
satisfactory.  Folders  are  provided  one  for  each  claim 
and  are  numbered  the  same  as  the  claim.  As  soon  as  a 
claim  is  paid  or  otherwise  disposed  of,  it  is  transferred 
so  that  the  files  in  daily  use  will  contain  nothing  but  live 
matter.  Index  cards  numbered  in  multiples  of  ten  will 
be  very  desirable  where  there  are  many  claims,  as  they 
will  enable  the  claim  clerk  to  pick  out  readily  what  are 
required  for  the  day's  correspondence.  A  filing  box 
should  be  used  which  contains  cards,  one  for  each  claim, 
arranged  according  to  the  date  it  is  desired  to  write 
regarding  them.  These  contain 

1.  Name  of  transportation  company 

2.  Date   Claim   was    entered 

3.  Amount   of  claim 

4.  Number    of    claim. 

The  rest  of  the  space  on  the  cards  may  be  used  to 
stamp  the  dates  on  which  letters  were  written  regarding 
it.  The  general  practice  seems  to  be  to  write  once  a 
month  on  matters  of  this  kind,  but  in  any  event  a  set  of 
index  cards  from  one  to  thirty-one  is  all  that  is  required, 
as  when  writing  in  regard  to  a  claim  the  card  may  be 
placed  ahead  to  the  date  it  is  desired  to  take  it  up  again. 
This  arrangement  brings  the  list  of  claims  which  require 
attention  to  the  notice  of  the  claim  clerk  automatically. 
A  claim  register  which  is  simply  a  cheap  index  book, 
may  be  kept  in  which  each  claim  is  indexed  alphabetically 
and  in  the  back  of  this  the  numbers  may  be  placed  con- 
secutively, so  that  in  taking  out  the  cards  for  any  one 


88  MANUFACTURING  COSTS 

day  a  reference  to  the  serial  numbers  will  show  if  any 
have  been  disposed  of  or  paid.  A  line  is  drawn  through 
the  number  of  claims  paid  or  withdrawn.  This  is  not 
absolutely  necessary  however  as,  if  the  correspondence 
regarding  a  claim  is  not  in  its  place,  it  is  proper  to  con- 
sider that  the  claim  has  been  disposed  of,  in  which  case 
the  card  may  be  placed  in  the  back  of  the  filing  tray 
for  future  reference. 

The  claims  made  against  a  house  by  its  customers 
will  require  a  little  different  treatment.  They  usually 
consist  of  items  of  freight,  discount,  shortage  and  errors 
in  prices  or  extensions.  There  is  no  necessity  of  permit- 
ting matters  of  this  kind  to  run  month  after  month.  They 
can  be  settled  better  when  they  are  new,  than  at  any 
other  time,  as  later  many  of  the  facts  bearing  on  the  case 
are  likely  to  have  been  forgotten.  If  it  is  a  "question  of 
discount  or  freight,  it  is  either  allowable  or  not  allow- 
able and  it  should  be  up  to  the  claim  clerk  to  make  the 
necessary  credit  if  it  is  allowed  or  to  advise  the  customer 
if  it  is  not.  This  part  of  the  office  correspondence  calls 
for  considerable  tact.  A  customer  resents  abruptness  in 
telling  him  that  his  claim  is  not  a  proper  one  and  this 
work  will  be  handled  better  by  having  it  directly  under 
the  supervision  of  the  sales  manager,  than  in  any  other 
way.  He  is  in  a  position  to  know  the  peculiarities  of  the 
customer  and  can  outline  what  is  best  to  say  in  those 
cases  where  the  claim  clerk  is  in  doubt.  There  is  no 
doubt  whatever  that  many  firms  lose  thousands  of  dollars 
worth  of  business  annually  just  because  the  complaints 
are  not  handled  in  the  proper  way.  An  explanation  will 
often  smooth  things  over  and  you  can  reason  with  a  man 
where  you  cannot  drive  him.  Keeping  a  customer  is  just 
as  necessary  as  getting  one  and  a  customer  once  lost  is 
hard  to  get  in  line  again.  It  will  often  be  found  advisable 
to  send  the  salesman  a  copy  of  letters  written  in  matters 


AND  SELLING  COSTS  89 

of  this  kind  and  it  may  be  a  good  plan  to  have  the  sales- 
man settle  the  whole  matter  the  first  time  he  calls  on 
that  customer. 

The  whole  matter  of  handling  claims  will  simmer 
down  to  system  and  tact.  A  proper  system  of  filing  and 
a  tactful  man  at  the  head  of  the  department,  one  who  will 
remove  the  edge  from  a  sometimes  disagreeable  statement 
by  stating  the  proposition  in  a  fair  and  square  business- 
like letter,  are  all  very  desirable. 


HOW  TO  FILE  CLAIMS 

The  problem  of  filing  claims  is  not  very  perplexing 
when  the  number  is  small,  but  when  there  are  hundreds 
of  them  to  look  after  there  must  be  a  system  devised 
which  will  enable  a  letter  regarding  a  claim  to  be  given 
proper  attention,  even  though  the  customer  does  not  give 
the  claim  number  as  requested. 

It  is  the  small  consumer  as  a  rule  who  ignores 
requests  of  this  character.  The  claim  number  means 
nothing  to  him.  He  keeps  his  invoices  on  a  spindle  and 
when  they  are  paid  throws  them  into  a  drawer  and  he 
forms  his  own  idea  of  your  business  from  his  own 
reasoning,  that  as  his  claim  is  important  to  him  it  must 
be  to  you.  This  view  is  correct  in  a  way,  yet  the  point 
he  does  not  consider  is,  that  where  one  credit  is  due  him 
the  house  he  is  doing  business  with  may  have  hundreds 
daily  equally  important.  The  following  plan  may  assist 
in  the  handling  of  matters  of  this  kind  and  is  given  in 
the  belief  that  it  is  new  and  untried.  Yet  in  spite  of 
this  fact  it  should  work  out  entirely  satisfactory.  An 
alphabetical  index  is  used,  in  which  the  names  of  the 


90  MANUFACTURING  COSTS 

customers  who  make  claims  and  the  names  of  the  people 
from  whom  material  is  purchased  are  written  as  often 
as  they  are  required.  The  number  given,  a  name  is 
never  changed.  Subsequent  claims  are  designated  by  a 
letter,  thus:  Claim  4i8A  would  be  the  number  of  the 
first  claim  entered,  4186  the  second  and  so  on.  A  vertical 
file  will  be  found  very  convenient  for  filing  the  folders 
relating  to  a  claim,  one  of  which  is  used  for  each  letter 
required,  although  as  a  rule  one  folder  for  a  customer 
will  be  all  that  is  required.  If  a  letter  comes  in  regard- 
ing a  claim  and  does  not  give  the  claim  number,  a  refer- 
ence to  the  index  will  show  where  the  rest  of  the  papers 
may  be  found,  while  if  the  number  is  given  it  is  only 
necessary  to  turn  to  the  file  and  get  the  needed  documents. 


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